The prospect of another US fiscal package of $1.9-trillion, equivalent to 9% of the country’s GDP, has provided further ammunition to a global rotation trade that has been in play for months now.
Beneficiaries to date have been equities in both developed and emerging markets. This year, the gap between the developed and emerging market stock market performances has been widening. For instance, South Africa’s All Share Index has gained 9.4% year to date — more than a five percentage point lead on the S&P 500 Index.
BNP Paribas analyst Nathalie Benatia says: “It, along with the prospect of vaccines, largely explains the rally in risk assets since. The same conviction will likely be underpinned by the latest vaccine development news and the initial encouraging results on acquired immunity, even though questions remain over the pace of vaccination.”
The jury is still very much out on whether inflation is due to make a comeback and become an intractable feature of the post-Covid economic landscape. Bond market investors certainly think so, with inflation expectations becoming hardwired into fixed interest assets in the US and at home, where inflation-linked bonds are looking relatively more attractive than nominal bonds, even though inflation is still below the SA Reserve Bank’s target range.
In an article on the reflation trade, BloombergQuint’s Justina Lee captures the dissenting views on inflation: “Some investors contend that the no-expense-spared response by governments around the world to Covid and vows by central banks to keep rates lower for longer has put economies on course for inflation on a scale unseen in decades.
According to BNP Paribas analyst John Carey, other risks that stand in the way of a prolonged reflation rally in risk assets include the impact of tighter lockdowns on economic growth prospects and a variety of vaccine-related stumbling blocks.
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