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Broadening reflation

We believe the reflation trade – overweighting cyclical equities – has room to run, especially outside the US.

What’s changing?

The increasingly broad-based and synchronised global recovery is buoying corporate earnings in markets beyond the US. This is particularly the case in Japan and emerging markets, but Europe is a bright spot as well. These strong prospects for earnings growth, combined with reasonable valuations, underpin our preference for non-US stocks at this time. Worries over upcoming elections in Europe look overstated, in our view, unduly dampening investor interest in European stocks. A speedy reset in valuations could accompany fading fears of populist upset as we move through this election-filled year.

Earnings upswing

Changes in corporate profit estimates, 2012–2017

Broadening reflation

Sources: BlackRock Investment Institute, MSCI and Thomson Reuters, March 2017.
Notes: the lines show the three-month change in the aggregate 12-month forward earnings estimates. The data are based on the MSCI US, EMU, Japan and EM indexes.

Our outlook for bonds is less sanguine. Fixed income assets are likely to be challenged amid broadly rising interest rates – and high valuations and tight credit spreads leave little buffer to protect against losses. Bond investors may take some comfort in that we see a low probability of a sharp and sustained surge in yields. Ageing populations, heavy institutional demand for yield and still-accommodative monetary policy should subdue the rise, in our view. But hazards exist, calling for a more dynamic approach to fixed income investing.

 

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Suggestions for a reflationary environment: Be selective for growth

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This material is prepared by BlackRock and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of March 2017 and may change as subsequent conditions vary.

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