The initial investor euphoria about the new US administration’s economic policy plans seems to be fading, prompting some strategists to warn that the post-election “reflation trade” could unravel soon. However, the reflation theme clearly preceded the US election. As long as its global drivers remain intact, a lack of new US policy impulses will probably not suffice to reverse this trend.
Next week, we will hold our quarterly review to set our investment policy parameters for the next three to six months - i.e. our tactical asset allocation (TAA). The resulting decisions, which represent the investment house view of the multi-asset investment strategies managed by LGT Capital Partners, will be published in the LGT Beacon on April 5th.
Meanwhile, today we comment on some factual developments, without preempting any specific TAA outcome. In recent weeks, more and more market participants appear to be questioning the sustainability of the post-election “reflation trade,“ as the initial investor enthusiasm about the US President Donald Trump’s economic plans appears to be cooling off amid a lack of tangible policy decisions thus far. However, beyond short-term volatility outbursts, which are always possible, we find that markets are consistently signaling continued successful reflation - globally. We would thus remain constructive on markets.
To back up the above points, we show a number of charts on the next page. In short, markets are behaving exactly as they should. Yield curves are steeper in most major economies, as easier current monetary conditions are being balanced by higher levels of expected future inflation, which should boost prospective bank earnings and support economic growth and trade among nations. Unsurprisingly, developed market banks, and cyclical sectors such as industrials, technology, or marine transportation continue to outperform. These trends remain robust.
The only potential exception in this regard concerns the US dollar. The greenback is still trading higher than before the election, but has thus far failed to recapture its December highs. While this is not inconsistent with the global reflation theme, it suggests that the momentum of success may be shifting from the US to other economies, making the likes of the euro or the yen more attractive again (indeed, yield curves in the Eurozone and Japan have recently continued to steepen, while remaining little changed in the US). Thus, overall, we would generally advise against reducing exposure to the global reflationary theme at this point.
Note: The next LGT Beacon will be published on 5 April 2017.