Central banks across the world have been desperately trying to create inflation for years now. If inflation did return to the radar screen, monetary policy wonks could celebrate that the past decade’s extraordinary policy measures are finally beginning to lift the global economy out of its decade-long funk. So, bring on inflation. It would signal the normalisation of economic activity and market functioning. In a normal market, monetary tightening is very good for risk assets such as equities.
President-elect Donald Trump’s plans to accelerate spending on infrastructure in the world’s most systemically important economy heralds two things. First, the passing of the baton from monetary to fiscal and industrial policy, with their more direct multiplier effects. And second, that business investment confidence should solidify. Both of these would be good news for equities. Santa Claus may not be coming to every market this Christmas, but he’ll probably be coming to an equity market near you.
Tom Stevenson, investment director for personal investing at Fidelity International, says No.
Christmas came early this year, with Santa Trump promising growth, tax cuts and lighter regulation in 2017. Investors positioned themselves accordingly, with US-focused shares the main winners. The Russell 2000 small-cap index is up 12 per cent since the election.
I remain positive for 2017 and expect five key themes to play out – equities to outperform bonds, developed markets to beat emerging ones, inflation to replace deflation, cyclical shares to do better than expensive defensives, and rising interest rates to give the dollar a boost. How much is in the price? US equities are not cheap so investors want to see that Trump’s deficit spending is delivering. So far they have given him the benefit of the doubt.
Between now and Christmas, though, investors will most likely have to navigate a second US interest rate hike. It has been well-flagged, but markets may pause for breath as they absorb the start of a new tightening cycle. That and rising political uncertainty, starting in Italy, points to a nervous December.