Inflation looked set to finally reappear in global markets in 2017, buoyed by United States President-elect Donald Trump’s fiscal policies and their effect on the US economy.
Speaking via video link at a media briefing in Sydney yesterday, Blackrock’s Hong Kong-based chief investment officer for active investments, Belinda Boa, said the theme of ‘reflation’, or inflation coupled with global growth, was set to transform global markets in the coming year.
“This is a theme that has been building since the middle of the year, but we’ve really seen that the US election results have amplified this in terms of growth and inflation outlook, as well as this policy shift to more fiscal spend,” Boa said.
“We can see that the US has taken the lead in terms of inflation – we are seeing both manufacturing and services PMI (purchasing managers index) spiking more recently, but also we have seen an increase in wage inflation, which is what we were expecting.”
She said China had also followed the US’s lead in producing positive inflation results during the third quarter of 2016 for the first time in five years, meaning the reappearance of inflation was not just centred on a single economy.
“This has significant positive implications for industrial profits and corporate earnings out of China, so it‘s not just a US inflation story,” she noted.
While it was hard to predict the precise impact of Trump’s economic policies, the best estimates suggested the President-elect’s tax cut plans in particular could stimulate further spending in the US economy, she said.
“Based on the estimates, most of [Trump’s] fiscal reform is going to be driven by tax, whether it’s corporate or individual tax cuts,” she said.
“The second point is the huge amount of uncertainty around what the fiscal spend may do in the US – the range or uncertainty around the impact of this is still pretty large.”
Following the election of Trump and the Brexit vote, political risks were likely to continue having an effect on the global economy in 2017, particularly in Europe where several important elections were due, she added.
“Italy, France, Germany, the Netherlands, all of them are facing political risks around this rise of populism that we have seen over the course of 2016,” she said.
Thursday 15 December 2016