Most comments published on this front are focused on President Trump’s election. Since then, investors have been building up expectations of a sizeable fiscal stimulus through corporate tax cuts and financial deregulation to significantly prop up growth in the largest world economy. These, to us, have definitely been part of the catalysts, but can rather be seen as magnifiers of an already-established trend.
Since last September, global macroeconomic data have been broadly accelerating, as illustrated by business surveys hitting record-high levels. Deflation fears have been progressively fading away, helped by the significant rebound of commodity prices. One should note that this drift has not been restricted to the US, but we have observed a pick-up in activity in Eurozone and Japan as well, while Chinese growth has significantly surprised the consensus on the upside.
Markets had initially reacted very strongly – the so-called ‘Reflation trade’ – with risky assets in developed markets, and more particularly, US cyclicals including banks outperforming defensive and emerging peers, and US inflation breakevens repricing significantly higher. After rushing into it in a hurry, investors have apparently started during the first weeks of 2017 to search for evidence before confirming their initial enthusiasm. In the meantime, barring any announcement of a game-changing fiscal incentive or a strong protectionist turn from the US towards its major Far East partners, the reflation trade somehow took a breath.
At this stage, with the Fed hinting that all conditions are met for a hike in March and with a continuation of the strong positive macro momentum, we stick to playing the reflationary environment while rotating to some less crowded and expensive assets, especially tapping into the Eurozone.
Florian Neto, CFA
Multi-Asset Client Portfolio Manager
Gross performances of our strategies (February 28, 2017)
Amundi, data as at end of February 2017. Gross performance of “Balanced Institutional Absolute Return Low volatility “, Multimanager Multi-Asset Fund of Funds (Bonds)“ GIPS composites in euro. Their respective benchmarks are: Eonia capitalized and a composite benchmark: 50% JPM EMU Government Bond Index, 30% JPM Government Bond, 20% Exane ECI – Europe Convertible. Past performance is not a reliable indicator of future results or a guarantee of future returns.