Question

As a porfolio manager, assessment how a government contractionary fiscal policy will impact your product selection and asset allocation strategy.

Please response in 500 words with focus on product selection and asset allocation.

Answer 1

Government is responsible for fiscal policy in the economy and it uses the power to maneuver the economy. Expansionary policy is used to stimulate the economy when it is in recession. On the other hand, contractionary policy is used when there chances of overheating of the economy.

Contractionary policy involves curbing aggregate demand in the economy through raising taxes or reducing government expenditure or using both the tools. This policy reduces disposable income available for the consumption and also decreases corporate profit. However, this could raise interest rate in the economy and it gives an opportunity to invest in interest rate sensitive assets.

It is time to cut exposure to leisure and discretionary items such as hotels, jewelry as it will get hit. However, FMCG, pharma, and healthcare remain of prime importance so even in the recessionary or contractionary environment, these sectors perform well. As tax can eat up corporate profit, bonds can provide a steady income in the scenario of higher interest rates.