THE objective of policy makers in the West since the financial crisis hit in 2008/2009 has been to return to “self-sustaining” – that is to say employment-led – growth.

The most recent evidence from economic data and quarterly earnings is that we may be moving tantalisingly close to that point.

The signs of hope mainly emanate from the United States, where employment surveys are showing signs of life. For the first time, these signals are backed up by data from corporate earnings showing that capital expenditures are once again growing rapidly, suggesting that the improvement in the employment data is not just a seasonal anomaly.

If this were an ordinary cycle, forecasters would soon be predicting the imminent withdrawal of any unusually supportive monetary policy initiatives that were in place.

However, self-evidently it is a very abnormal cycle. Far from looking to withdraw extraordinary stimulus, the Federal Reserve is implementing a programme of extended quantitative easing – broadly, underwriting an environment of low interest rates across the yield curve for the foreseeable future.

This policy can be viewed as a “belt and braces” policy designed to ensure two things.

Firstly, to ensure that the cost of funds to consumers and the housing markets does not rise, which could stifle any nascent increase in lending inclinations on the part of the banks.

The second purpose is to ensure that there is an orderly handing back to the banks of the role the Federal Reserve assumed in supporting lending in the economy.

So, with good things beginning to happen in the engine room of the developed world and no sign that monetary authorities are about to remove the punchbowl before the party gets started, surely it is right to be very bullish on equity markets?

We think the answer to this question is a qualified “yes”.

Stocks and shares of blue-chip companies are indeed very cheap relative to “risk-free” alternatives (government bonds).

Their capital positions are generally very sound and they offer both exposure to global growth and some protection against the return of inflation – however unlikely this may seem today.

However, just as the “green shoots” of recovery are becoming more visible, so the danger that they may be trampled under politicians’ “hob-nail boots” remains an unwelcome possibility.

This is a by-product of better times, as greater confidence in the economic climate enables politicians to focus on regulatory initiatives designed to strengthen the financial system. However worthy the objectives, this presents risks, too, as can be seen from the efforts to reinforce the mechanisms that ensure sustainability of the euro, which have threatened to revive the eurozone sovereign debt troubles.

A second source of political risk comes from a return to confrontational global “economic politics”.

Here we refer to simmering friction in currency markets. The same “QE2” policy that can be viewed as a “belt and braces” for US growth can also be viewed (and has been loudly condemned by China and many in Europe) as an attempt to force the dollar downwards.

Ultimately, we expect political banana-skins to be side-stepped. However, any investment policy must recognise that many of the issues that are at stake are of sufficient strategic importance that some may be prepared to pay a price, in terms of near-term economic performance, in order to secure a more favourable longer-term outcome.

John Haynes,

Head of Research,

Rensburg Sheppards