Generating inflation highly desirable to policymakers

“We believe generating inflation is highly desirable to policymakers in the current environment because the alternative means of deleveraging—austerity, growth and default—are either insufficient or unthinkable.

“We think the success or failure of this next phase of policy response depends upon the degree of control policymakers can exert over economic variables through their expanded toolkit.”

Much has been written about the “death of neoliberalism,” and that doctrine is certainly under threat from obstructionist and anti- globalization forces around the world.

However, both Boersma and Sweeting did not anticipate a wholesale rejection of the freemarket, supply- side economics introduced by Ronald Reagan and Margaret Thatcher.

“Instead, we believe the globalisation of laissez-faire capitalism will likely be rolled back into the domestic sphere.

“To this end, any policies perceived as a threat to domestic job creation will likely be targeted, while anything perceived as supportive of domestic economic growth will likely be promoted.” Global equities look reasonably well positioned in this environment, they added.

“After all, equities are ownership shares in companies, and companies tend to have pricing power that allows them to pass through higher input costs and potentially weather an environment of rising inflation.”

On the other hand, they believed this environment is likely to be hostile to holders of securities with income that is fixed, or unable to respond to prices, like bonds.

Also likely to suffer in this environment are the bond proxies within equity markets— the sectors like consumer staples and utilities that are historically the most correlated (inversely) with nominal yields.

The high starting-point valuations of such sectors as of late 2016 only amplifies the risk.

“On the other hand, the sectors we believe are likely to do well in such an environment are the ones that, historically, are positively correlated with nominal yields, namely the financials, resourceoriented and consumer cyclical sectors that today make up much of the benchmarks for value investments.

“These are sectors that, in some instances, traded at the widest discount to the rest of the market on record as of mid-November, so we think the scope for potential recovery is material.