BlackRock: These 3 Interrelated Themes Are Likely To Shape Investing This Quarter

Written by Richard Turnill (BlackRockBlog.com)

Reflation is going global as the second quarter of 2017 begins.

Global growth expectations are on the rise—and we see room for more upside surprises…

a rebound in inflation expectations from mid-2016 lows,
a bottoming out in core inflation and wages,
and a synchronized pick-up in economic activity indicators and corporate earnings estimates.

What are the risks to our reflation thesis?

First would be an overshoot in expectations of monetary tightening leading to a sharp rise in the U.S. dollar, tightening global financial conditions.

Second, corporate investment could be slower to materialize than surveys have indicated. This could set markets up for disappointment, particularly in the U.S.

Third, any rise in protectionism could also curb growth and lift inflation. We see upside risk in Europe, where we do not expect elections to deliver the populist outcomes that markets have been fearing.

Against this backdrop, we believe three interrelated themes are likely to shape investing this quarter, namely:

Theme 1: Broadening reflation

We believe the reflation trade—overweighting cyclical equities—has room to run, especially outside the U.S.

We see an inflection point in growth, inflation, and monetary policy, and markets are catching up to these fast-changing dynamics.

Spreading global reflation is driving a long-awaited rebound in global corporate earnings, with the sharpest recoveries seen outside the U.S. This synchronized global recovery in corporate earnings is supporting equities. Cost discipline (resources), hopes for regulatory easing (financials) and innovation (technology) are all also contributing to strong 2017 earnings expectations.

Earnings momentum is particularly strong in Japan and emerging markets (EM), while solid in Europe. This supports our preference for stocks in those regions. See the Earnings upswing chart.