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LGT Beacon: Globally consistent reflationary signals

March 22, 2017

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. 

  • The main reflation driver remains in place: global policy settings are now well-calibrated to support an acceleration of economic growth, without risking excessive inflation. Importantly, despite improving data and buoyant markets, the major central banks remain mindful not to tighten prematurely, allowing the positive momentum to build-up further. Last week’s Federal Reserve decision to raise short-term policy interest rates without altering its long-term rate plans confirms this point. 
  • Meanwhile, the economic data continues to consistently confirm the reflation theme across the geographies, in both forward-looking business and sentiment surveys, as well as in most backward-looking hard data sets. Financial market trends also remain in line with benign reflation across all asset classes and regions. The data is likely to soften somewhat going forward, which is why the first point about refraining from undue tightening remains key. 
  • Last but not least, the global reflationary theme began long before the election of Donald Trump. Specifically, it started between late January and mid-February 2016, i.e. when Japan introduced negative interest rates to expand its reflationary policy mix, and China announced its monetary policy returned to an “easing bias” again. It is also worth noting that these decisions were, at the time, viewed negatively or ignored by most commentators, which reminds us not to take the prevailing short-term consensus too seriously. Similarly, widely-held current concerns about the Trump administration’s protectionist rhetoric could prove just as transitory.   

Growth and rate-sensitive sectors continue to perform well

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.

Read more in the LGT Beacon

Read about the resulting investment positioning changes in our portfolios in the LGT Beacon below. To subscribe to a weekly newsletter, go to subscriptions.

Note: The next LGT Beacon will be published on 5 April 2017.