Reflation Trade Gets Second Life as Investec Champions Stocks

  • Stopford at $124b fund bullish on growth cycle, risk assets
  • Hawkish Fed to spur dollar, Treasury yields: BAML, MS

Yellen Says Gradual Rate Hikes Are Still Warranted

If you were disappointed by the Trump reflation trade, pin your hopes on Janet Yellen.

So say strategists and investors at the likes of Bank of America Merrill Lynch and Investec Asset Management, who are betting a hawkish turn by the Federal Reserve chair this week is a reason to load up on stocks and cut interest-rate risk in bond portfolios.

The calls underline how the Fed’s resolve to hike rates and pare its $4.5 trillion balance sheet has the potential to revive dollar bulls and vindicate bond bears, who have struggled amid soft inflation data and President Donald Trump’s battle to enact his policy agenda.

“Time to dust off some of the Trump reflation trades into year end,” Bank of America strategists including James Barty said in a note to investors.

Bank of America Corp.

The strategists say investors should pare exposure to short-duration Treasuries and go long the U.S. dollar, adding that a stronger greenback should also spur European and Japanese equities. The bank forecasts 10-year yields will end the year at 2.85 percent compared with 2.24 percent currently.

Investec Bullish

With a Goldilocks-like revival in the global economy, John Stopford, the head of multi-asset income for Investec Asset’s $124 billion of holdings, favors growth stocks and developing economies.

“We’re constructive on the growth cycle and assets tied to that,” Stopford said in a telephone interview. “Equities and emerging-market risk are definitely two areas where we see opportunities.”

Stopford is maintaining duration in his bond portfolio at about two years. “The Fed’s likely to stick to their guns and raise interest rates next year and the market hasn’t really reflected that,” he said.

Morgan Stanley strategists, meanwhile, reckon this week’s uptick in 10-year Treasury yields - triggered by the Fed’s commitment to hike again this year while keeping interest-rate projections for 2018 intact - should support long dollar trades. Stocks should continue to outperform credit given the latter’s greater sensitivity to moves in interest rates, they say.

“Energy should also do well if we start to see an upturn in inflation and bond yields,” strategists at the U.S. bank led by Graham Secker wrote in a note Friday.

— With assistance by Lananh Nguyen

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