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Since Donald Trump was elected, investors have
gradually been reassured on their fears on deflation,
growth in emerging markets, and uncertainties on the
euro area, which had dented appetite for risk between
end-October 2015 and mid-February 2016. They
therefore played the global reflation theme.
World growth is clearly accelerating and resynchronizing,
and the threat of deflation is dwindling.
This combination
of an upturn in real growth and a rise in inflation is
broadly favorable for the overall earnings per share
growth trend, which should come out at close to 13%
this year.
The phase of acceleration in inflation now seems to be
behind us and leading indicators are beginning to turn
around in some areas, particularly the US and China. The
expected corporation tax reform in the US should further
shore up corporate profitability in 2018, even if the
implementation of other reforms is looking much less
likely in view of Donald Trump’s dwindling political
credibility. Lastly, the main central banks should start
cutting back their balance sheets out to end-2017, and
some have already started to rein in liquidity or are
preparing to announce this type of move (ECB). The end
to US monetary expansion actually dates back to spring
2014 and has been gathering pace since then.
Looking to emergings, improved global financial
conditions and a good showing from commodities have
been positive. But the gradual normalization of monetary
policy, the progressive reduction in liquidity in dollars
and the slowdown in Chinese growth (which drove
commodities) could drag down these economies.
While long positions on dollars, commodities and
emerging equities look vulnerable among the reflation
trades that have been driving the markets, others still
seem to harbor potential in our view, such as euro area
equities, which still benefit from accommodative financial
conditions, solid economic fundamentals (PMI at a 6-year
high) and increased competitiveness due to the weak
euro, which buoys corporate profitability. The real
“justice of the peace” will be the recovery in household
consumer spending, which should be bolstered by more
accommodative fiscal policy and the decline in jobless
numbers.
In the euro area, we are still positive on themes such as
small caps, which are more exposed to the acceleration
in the economic cycle, as well as banking stocks and
Italy, which are set to benefit from the gradual increase
in interest rates.
We also maintain our positive stance on
Japanese equities and the emerging debt markets in local
currencies.
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