Interview
Markets Update: Inflation and Equities
- The global economy is expected to shift into a more reflationary environment characterized by synchronized growth stronger than seen in the last 30 years, with forecasts indicating 6.5% real GDP growth this year and over 4.5% next year.
- Fiscal and monetary conditions are projected to remain supportive, with zero policy rates anticipated until the second half of 2014 even in the US, creating negative real interest rates alongside an expected $1.5 trillion US fiscal program that would add 6.8% of GDP to the previously approved $900 billion.
- Markets are predicted to transition from fear of deflation to confidence in inflationary expectations, leading to a potential $16 trillion in physical infrastructure capital investment over the next couple of decades in a decarbonization-led world.
- Risk assets, particularly equities, are forecast to benefit from receding deflationary pressures, rising inflation, and strong profitability growth, with global profits in major stock markets expected to rise by approximately 35% in the current period and again in double digits in 2022.
- Specific sectors such as value stocks and cyclicals—including basic resources, chemicals, industrials, oil, financials, and building materials—are expected to outperform due to improved growth prospects, rising commodity prices, and operational leverage, with banks standing to gain significantly from rising interest rates and synchronized growth relative to defensive sectors.
- Investor sentiment is expected to shift toward higher-risk, volatile market segments as dividends improve and become more dependable, with dividend yields declining as payments increase, potentially driving capital outflow from government bonds into equities and causing relative equity valuations to rise.