Growth acceleration and some kind of reflation
Since summer there have been more and more clear signs of a shift in the policy regime, away from the focus on monetary stimulus towards fiscal support. The growing view is that the era of ever expanding QEs is drawing to an end, and that the next key policy tool is likely to be increased fiscal support, through both tax cuts and greater spending. Still-easy financial conditions in the US, Euro area, and EM, and a rise in global investment should see global growth pick up in 2017 and maybe bring about the first acceleration in global nominal GDP in seven years. Full or partial implementation of Trump's fiscal proposals would of course reverse the trend.
We suggest investors rotate into equities in decent size. We think that the transition from the deflation scare towards the reflationary backdrop is opening a meaningful window of opportunity for stocks to break out of the range that they have been stuck in since mid ‘14. Don’t forget equities are a real asset class, and ultimately they are likely to benefit from a reflation regime.
In that theme, sell your government bonds, diminish your duration and concentrate on high yield universe, investing mostly in short duration or dated funds to reduce the impact of volatility.
Eurozone remains mispriced
While the electoral calendar within the Eurozone has its risks, it might also be the chance to finally implement the reforms the European economy is desperately lacking. As the European recovery is on track driven by continuing strength in the German domestic economy buoyed by credit and a sharp decrease in unemployment, growth could accelerate over the potential providing for a great investment environment.
Indeed, low rates, oil prices and a depressed Euro offer all the ingredients needed for the recovery to gain traction. Even if inflation picks up only slightly driven by spending and base effects, it will help the corporate sector to see some unexpected nominal growth and a nice increase in EPS. Has this been fully priced in? Certainly not. Although political risks remain, market’s pessimistic pricing regarding European growth and asset markets provides for good risk-reward profile.
A less supportive global context for EM in 2017
Global trade looks set to be facing some headwinds going forward. 2017 is going to present a more challenging environment for EM assets. However, with lower current account deficits, higher real rates, and limited room for commodity prices to fall, we do not fear any collapse what so ever. In this context prefer EM debt to EM equities for carry purposes, but be ready to reverse depending on the scenario.
The increase in the PPI should not only help alleviate overcapacity fears, but also boost corporate profitability in China. We would favor Asia even if there is still risk of unsustainable debt growth.
The key risks to our constructive equity call are the prospect of more aggressive bond repricing if the Fed falls behind the curve, Euro politics, liquidity squeeze in EM given stronger USD, and of eventual recessionary profit rollover, given that US is still in what is a late stage of the cycle.
Oddo Meriten current convictions for each asset class:
Chairman & Co-CIO - Oddo Meriten AM
Global Co-CIO - Oddo Meriten AM
CIO Oddo Meriten AM GmbH
Head of Asset Allocation - Oddo Meriten AM GmbH
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