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Inflation expectations have surged dramatically since bottoming in February 2016, yet there is still a long way to go before seeing post-crisis levels.
Inflation expectations have accelerated since Trump’s election and his promises of a large fiscal stimulus. However, strong reflationary signs have already started post-election. Industrial commodities such as aluminum, zinc, nickel and copper have reversed a multi-year downtrend, with the Industrial Commodity Price Index up 40% year-on-year.
In the US hourly, earnings rose throughout most of the year as the job market tightened up. Core inflation (excluding food and energy) continues to rise, supported by increasing housing and healthcare prices. If Trumps delivers on his promises, it may add to that inflationary pressure.
Higher inflation should weigh on bonds in favour of equities, but being selective will be key as global monetary easing is slowly waning.
In the last quarter of 2016, the dispersion of stock returns reached the highest level since the financial crisis, during which strong positive momentum was building up on cyclicals such as financials, industrials, energy and technology.
We expect this momentum to persist in 2017, while ‘bond-like’ dividend stocks such as utilities or telecoms could suffer more as they remain highly valued. Geographically, we would favour the US or Japan compared to Europe, where political uncertainty may be a headwind.