‘Math wins’: Why investors should push harder on fiscal discipline

Investors need to start demanding that governments act with more fiscal discipline as ballooning debts on sovereign balance sheets around the world approach a breaking point, according to MFS Investments, one of the world’s oldest asset managers.

At the Top1000funds.com Fiduciary Investors Symposium in Singapore on Tuesday, MFS investment officer Kevin Dwan, who is responsible for equity and multi-asset portfolios, said “government is the only business in the planet where investors don’t demand operating leverage”, and that needs to change.

Dwan said that US federal expenditures as a percentage of non-government GDP have risen from around 23 per cent five decades ago to around 30 per cent in 2023, including a spike during the COVID years to around 57 per cent.

“If you go back to 1913, it was zero. And this is [a problem in] every country in the world – it’s different magnitudes,” he told the symposium’s delegates.

“Why shouldn’t we see that number coming down? You should be able to get operating leverage.”

There isn’t necessarily a lack of solutions to this problem but politicians around the world are dragging their feet on making real changes, and over the long term that will start to hurt portfolio returns, Dwan said.

“There’s a few countries that have the ability to reasonably easily – and by ‘easily’ I mean they have energy, water and food and space. US, Canada, Japan and Australia could throw the doors open to managed migration – grow the economy in real terms, if they got to a place where there’s the political capital to do so,” he said.

“The math is understood, and it’s not that difficult. So over the longer term, do you get some resolve around solving some of these political issues? Politicians generally have to get to the edge of the cliff before they start to believe in gravity.”

The US’ net interest spending is growing rapidly and the government has cut the percentage of military spending in the budget by half over the past three decades to meet the increasing demand of servicing its debt, Dwan said. Some investors may be unwilling to act against the government but eventually they will have to under their fiduciary responsibility to maximise investment returns for their beneficiaries.

“Eventually we all will end up fighting the regulator, and you can do that sooner or later,” he said.

“Math wins in the end, I would encourage you all to have a voice. Doesn’t need to be on the front page of the newspaper… but ultimately you’re going to have to fix that equation, and you’re going to have to start to see some operating leverage in government.”

The conversation also addressed other investor concerns including geopolitical risks, which Dwan proposed is more subdued now despite conflicts in the Middle East and Venezuela.

 “I’d make the argument that geopolitical risk is lower today than it was a year ago. And I would make the argument that you’re much closer to lower energy prices over a 10-year view than you were nine weeks ago,” he said.

“In the short term, there’s different issues. In the longer term, ask yourself why Venezuela and Iran weren’t pumping crude [oil] to the maximum of their ability? I think you’ll get to some interesting answers.”