While it might be an exaggeration to say there is a global austerity trend afoot, there’s no denying that governments and other agencies worldwide are tightening fiscal policies and enacting austerity-like measures in varying degrees. This is part of a growing trend among some of the world’s biggest nations and institutions to rein in excessive spending, reduce debt and balance budgets, while also dealing with the effects of persistent inflation.
The potential payoff to these belt-tightening measures is that by exercising fiscal restraint and putting their nation’s finances in order, governments hope to improve their credit ratings and attract more investment capital, while also improving investor confidence and lowering interest rates. But it’s not just governments that are putting themselves on a proverbial diet.
Indeed, not only nations, but even universities across the United States and other countries are currently instituting their own self-described “financial austerity” programs. The latest one to embrace such a measure is Cornell University, which recently announced it will reduce its budget and workforce in the face of federal funding cuts, rising costs and potential new taxes on endowments.
For the investor, the problem is how to navigate this growing climate of global austerity (or “austerity-lite” in some cases) while hopefully profiting from market sectors that could benefit from these measures. We’ll discuss that here.
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Implementing an austerity program, or even a lighter version of it, isn’t without considerable risks. This was shown by the post-2008 attempts made by countries like Greece and Spain, which worsened their respective economic conditions and created massive social upheaval. What’s more, if enough nations embrace fiscal belt-tightening at the same time, it can have unintended effects that ripple across the global economy.
For instance, in the wake of the 2007-2009 credit crisis, several European nations enacted strenuous austerity programs that not only crippled their economies but also potentially contributed to a period of global stagnation, with many economists arguing that it led to a worldwide slowdown in trade and growth.
Currently, there are several nations undertaking varying degrees of austerity measures, including Argentina, France and the U.K., along with many smaller nations in Africa and Asia enacting IMF-led austerity programs. Arguably, the biggest “test case” for these fiscal restraint measures is Argentina, where President Javier Milei has presided over massive public spending cuts, mass layoffs in the public sector, pension freezes and deregulation as part of what has been described as “IMF‑backed shock therapy.”
The gamble for the country appears to be paying off, though, with Argentina posting its first fiscal surplus in over a decade in 2024, and with monthly surpluses continuing into this year. Inflation has been significantly reduced and economic growth is resuming, with estimates pegging a 5.5% year-over-year growth rate for 2025.
For the U.S., attempts at cutting federal spending this year through the Department of Government Efficiency (DOGE) have been met with resistance from some quarters, but with the White House seemingly undeterred in pushing forward, in some cases, massive spending and regulatory cuts. The stated goal of the cuts is to reduce up to $2 trillion from the federal budget, with emphasis on discretionary spending.
But while the federal spending cuts and job-slashing measures were sudden and often deep, they were accompanied by tax cuts and other initiatives designed to soften the blow—all of which keep it from being classified as a classic (i.e., full-scale) austerity program.
More importantly, this year’s accelerated rollout of AI across both private and public sectors has helped soften the blow that might have been more severe in the wake of the spending cuts. Indeed, by all accounts, the nation’s investment in AI has not only resulted in higher productivity and output across multiple sectors and industries, it’s providing much-needed improvements in supply chain efficiency. And while it has eliminated many entry-level jobs through task automation, it has also created new jobs (particularly in data management).
This brings us to the question of how the investor can position his or her portfolio to not only avoid any potential market shocks austerity-type measures might bring, but also to thrive in such a climate.
How to Invest With Global Austerity in Mind
Precious Metals
Probably the single best piece of advice I can dispense is one that never fails in such uncertain economic environments as this one, namely, own some gold. Having at least a small position of gold can cushion the blow from a variety of economic and geopolitical risks, but it can also produce significant gains since gold typically benefits from widespread uncertainty (as we’re seeing now).
Silver is also considerably undervalued versus gold, so owning some lower-cost silver—be it in the form of bullion coins, silver mining stocks or ETFs—is another way to prudently position your portfolio for austerity.
Consumer Staples and Utilities
As for sectors within the equity market that tend to be insulated from austerity measures, history shows that owning some blue-chip consumer staples stocks is typically ideal since the demand for basic food items and other necessities isn’t diminished by any economic shocks that accompany federal cost cutting.
Other areas of the market that tend to remain shielded from austerity measures—and can even benefit from them due to steady demand—include utilities and telecom service providers (with Internet and mobile now regarded as utilities).
Investments to Avoid
As for which areas of the market should be eschewed during times when governments are aggressive in slashing spending and raising taxes, it’s usually best to avoid sensitive sectors like education (as we’ve already seen here), construction and consumer discretionary.
Above all, investors should be nimble in order to take advantage of the periodic market rallies that inevitably occur in the midst of ongoing austerity programs. (These favorable episodes occur when governments inevitably are forced by public backlash to temporarily back down from some of their fiscal strictures, resulting in a period of relief for financial markets.)
Here at the Cabot Turnaround Letter, we’re not only positioning our portfolio to benefit from the global austerity environment, but we also know how to take advantage of the periodic “pullbacks” that always occur within the context of fiscal frugality initiatives. If you’re a bargain-oriented investor on the lookout for beaten-down stocks poised to rebound in the current market environment, we’re here to help you.
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