Global Equity Outlook

Factoring in reflation

Kate Moore |19-Jan-2017

The world is entering a period of US-led reflation – rising inflation and nominal growth – driven by an awakening of animal spirits and expectations of fiscal stimulus. We see this trend supporting the outperformance of value and small-cap equities.

Equity highlights

  • It’s time to dig deeper for opportunities as equity valuations become more expensive. We see potential for outperformance in equity style factors such as value (the cheapest corner of the market) and size (small and mid caps).
  • Value has historically outperformed during periods of economic reflation. We see further upside after a revival of value stocks last year. Financial stocks have additional room to run after rallying on prospects of a lighter regulatory burden.
  • Rising small-business optimism and the prospect of tax cuts could lay the foundation for another phase in a US small-cap bull market. Within small caps, we prefer cyclical sectors such as energy, materials and industrials.

Snapshot

Investors have long looked for connections between stock returns and stages of the business cycle. The opportunities in factor investing, which targets persistent drivers of returns for a group of equities, fluctuate over time. Volatile returns on equity factors since the financial crisis illustrate this point, as the chart below shows. Value and size have historically outperformed when growth is accelerating. We see a reflationary macro backdrop supporting both factors in 2017. This is a US-led story for now, but global opportunities should emerge as reflation spreads.

Fluctuating factors
US equity factor returns, 2010-2016

US equity factor returns, 2010-2016

Sources: BlackRock Investment Institute and MSCI, January 2017. Notes: The chart compares the MSCI USA Index (total returns including dividends) with MSCI’s following factor indexes: USA Enhanced Value (value), USA Minimum Volatility (low vol), USA Momentum (momentum), USA Risk-Weighted (size) and USA Sector Neutral Quality (quality). Index performance is for illustrative purposes only; past performance does not guarantee future returns.

Kate Moore
Chief Equity Strategist
Kate Moore, Managing Director, is Chief Equity Strategist for BlackRock and is a member of the BlackRock Investment Institute.
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John Coyle
Portfolio Manager, Global Small Cap team
Carrie King
Portfolio Manager, Basic Value Fund team
Yakov Shenkman
Risk & Quantitative Analysis team for U.S. equities
Sara Shores
Head of Strategy, Factor-Based Investing group