The big winner: emerging markets

When it comes to your portfolio, there are winners and losers from reflation, or a return to economic growth. Stocks have historically done well under this environment because they are geared to global growth.

BlackRock five-year asset return assumptions in USD, Q2 2017

Real GDP Growth

Sources: BlackRock Investment Institute and BlackRock Solutions, May 2017.
Notes: This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. Representative indexes used are: Barclays Global Aggregate Treasury Index ex U.S. (Global ex-U.S. gov. bonds), Barclays Government Index (U.S. Treasuries), Barclays U.S. Credit Index (U.S. investment grade), JP Morgan EMBI Global Diversified Index, (EM debt $), Barclays U.S. High Yield Index (U.S. high yield), MSCI USA Index (U.S. large cap), MSCI World ex USA Index (Global ex-US large cap) and MSCI Emerging Markets Index (EM equity). Indexes are unmanaged and used for illustrative purposes only. They are not intended to be indicative of any fund or strategy's performance. It is not possible to invest directly in an index.

But some of the biggest winners are likely to be emerging markets, including Asia.

Cyclical sectors – particularly industries in which revenues tend to move in line with economic cycles – should see a revival. Mining and energy companies will benefit from long-term demand for resources, urbanisation and massive demand for infrastructure in emerging markets. Banks and insurers will also win from global economic growth, with rising interest rates to translate to higher loan profitability.

Reflation reverses for income

The biggest impact of reflation is on income, which could be harder to come by. This environment is negative for bonds, particularly government bonds and longer-duration bonds, which are more sensitive to interest rates rises.

If you’re looking for income, you’ll have to look harder. This could mean exploring stocks of companies that are well placed to maintain dividend payouts, or a wider range of high-yielding debt, such as Asian corporate or emerging-market sovereign bonds.