Reinflation in the US and uncertainty in Europe could present opportunities

WITH ELECTIONS very much in focus across the developed world over the next few weeks and months, it pays to keep a close eye on how geo-political and macroeconomic factors are impacting different regions and markets. Financial markets often ‘misprice’ economic trends, and spotting these price anomalies can present some interesting investment opportunities.

In the USA, ‘reinflation’ is the word of the moment as Donald Trump marks 100 days at the helm. His aim is to reflate the economy by employing fiscal stimulus which some say is somewhat unprecedented at this midto-late stage in the recovery cycle. Expectations are for steady rate rises in America, though these forecasts could turn more hawkish if wage inflation and supply-side pressures increase. The FED will be keen to avoid a situation whereby growth is stifled due to rapidly rising interest rates, such that we see a move from reflation to ‘stagflation’. As American policy changes, so too do investment implications and a flexible and diverse strategy is important. The political scene in Europe is causing heightened tension with several key elections taking place imminently. Having said that, Europe is gradually seeing growth come through and company earnings are improving, especially for European exporters. This improving picture is offsetting some of the short terms headwinds, and low relative asset valuations have led to interest in European stocks.

Japan has undergone much political and economic change over the last few years and the question is what happens after Abenomics? Policy setters are still struggling to increase domestic consumption, and to generate inflation, and are keen to keep 10 year yields and interest rates at less than 0%. It is likely that new policies will create opportunities in this cyclical market and there could well be some mispricing to exploit when contemplating Japan’s low interest rate policy versus America’s rising rate policy.

The US dollar has weakened a little over recent weeks due to a slightly more dovish tone from the FED, and Emerging Markets have benefited from this as the cost of servicing their debt has reduced. This has, in turn, given the Emerging Markets a little breathing space to rebalance which will have implications on assets’ classes and valuations throughout the region.

Two investment themes which could benefit from some of the global economic events are global financials and technology. We shall be seeking out, and looking to benefit from, price anomalies in these areas over the coming months.

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