Reflation bet on stronger growth via reflation

Investors are refusing to call time on expectations of a sustained recovery in the global economy, after propelling global markets to their best quarterly performance since 2013.

Money managers say they are willing to look past rising political uncertainty in France and the US and bet on what they view as an acceleration in activity and synchronised economic advances across developed and emerging markets.

Expectations of US fiscal stimulus later this year still remain firm as investors look beyond the failure of Donald Trump’s efforts on healthcare reform.

David Woo at Bank of America Merrill Lynch said the failure of healthcare reform had increased the possibility of tax reform and was a “new lease of life” in Trump or reflation trades.

Buoyant measures of consumer sentiment and improving business conditions have reinforced the bullish mood among investors, who expect vindication from stronger macro economic data in the coming weeks.

“The soft data has been by our measures accelerating and running at extremely high levels that we haven’t seen in many years,” said Michael Fredericks, a portfolio manager with BlackRock. “Although the hard data has been mixed, there are some legitimate reasons for optimism around the path of growth.”

The FTSE All-World index advanced 6.4 per cent during the first three months of 2017 and closed at a record level last month. European and emerging market equity funds have attracted significant inflows from investors, while US technology shares have lead Wall Street this year.

Stephen Jen of Eurizon SLJ Capital said he did not believe the equity, bond and currency markets were out of line with the fundamentals of an improving global economy.

The French elections posed a risk in the second quarter, which meant a tactical retreat from Trump trades was logical, Mr Jen suggested, “but it would not make sense to me to outright abandon them”.

US bond yields, he added, “still seem too low”, while equities had risen because of reflation rather than the Trump effect, and the dollar was back to pre-election levels.

“If anything, there is now more upside to the three Trump trades, after the recent corrections, if we can just get over the risks from France,” said Mr Jen.