Inflation is your friend. Year-to-date, the double levered Powershares DB G10 Currency Fund (DBV 25,41 0,00 0,00%) is up 4.3%. Brookfield Infrastructure Partners (BIP 29,02 +0,54 +1,90%) is up 8.3%. And of course the SPDR S&P 500 is up 4.75%. Reflation is the story. Still. How long is this going to last?
The big takeaway as of end of January has been that inflation assets have bested deflation assets over the short term, especially year-to-date, notes Arrow Insights a top-down investment research firm who thinks this inflation trade still has legs. The change from deflation trades to inflation ones began prior to the Nov. election, when a Trump win signalled fiscal reforms, namely tax breaks, and a commitment to infrastructure stimulus spending. A regulation rollback in healthcare and financials promised higher margins for banks and insurers. Inflation assets have beat defensive, deflation hedged assets for much of the past 12 months.
Remember when investors were actually buying negative yielding debt? They bought on the assumption that the negative interest rate policies of Europe and Japan would push yields even more into the red, giving them a capital gain on the bond they could always sell back to the central bank. That trade is winding down. Arrow Insights noted how the German 10 year Bund went from -0.13% in June 2016 to +0.44% in January 2017.
Later this year, seasonal and valuation factors should take a bite out of stock returns even if inflation is still the order of business in the markets. Investors are also ignoring the political noise in Washington, even as the decimals get cranked so loud the volume switch has broken off. Trade wars and euro-skepticism in France are major headwinds for this reflation narratives insofar as they could put the breaks on faster than consensus expects.
Arrow Insights likes the following inflation trades over the next six months:
But low quality inflation hedged global stocks and bonds versus high quality deflation hedged global bonds and commodities. They have an index for the first one called the A.I. Quality Value Momentum Index (AIQVM). This compares to the Dow Jones Global Composite Yield Total Return Index on the other side of that short-term trade.
Buy high quality deflation hedged global stocks and commodities versus hiqh quality deflation hedged bonds.
Arrow Insights has tradable indices for these inflationary themes. The firm outlined their analysis on inflation versus deflation securities in their January report to clients.