• Commodities, TIPs should benefit from government spending
  • Politicians would favor Main Street over Wall Street

Commodities, bonds that protect against inflation, real estate and the equities of small Chinese companies compose the shopping list for Bank of America Corp. if the world economy slides into recession next year.

Behind the selection is the New York-based bank’s expectation of a “massive policy shift” if 2016 does mark a new year of contracting economies and fresh deflation fears.

Rather than relying on ultra-loose monetary policy again, another downturn would force authorities in the U.S., Europe and Japan to deploy fiscal stimulus, according to a report this week by the team led by Michael Hartnett, BofA’s chief investment strategist. By contrast, China would flip away from government spending toward quantitative easing.

If governments did cut taxes and boost spending, that should be enough to spark expectations of faster price pressures among investors, spurring demand for gold, inflation-protected Treasury bonds and property, the BofA strategists said.

Commodities would also get a lift as officials invested in infrastructure, taking advantage of cheap raw materials and low borrowing costs. The strategists noted the issuance of bonds by U.S. municipalities is currently running at the lowest level since 1997.

As for China, resorting to easy monetary policy would benefit its small-cap companies just as their western counterparts have gained amid years of near-zero interest rates and bond buying.

Switching Direction

Policy makers would be switching direction because another recession would suggest quantitative easing has failed to boost economic growth, according to Bank of America.

Seven years since the last worldwide recession, borrowing costs close to zero are still in place in 55 percent of the world economy and more than half of all government bonds yield less than 1 percent.

Another reason to anticipate a new policy approach is that recent years have fanned income inequality and the rise of populist politicians from Greek Prime Minister Alexis Tsipras to U.K. opposition leader Jeremy Corbyn and U.S. presidential contender Donald Trump.

That suggests to BofA that if economies buckle again, investors should avoid stocks in the BI Global Luxury Goods Index and the NYSE Arca Securities Broker/Dealer Index as leaders turn their attention to Main Street over Wall Street.

“Investors must discount a new policy mix in 2016,” Hartnett and colleagues said.

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