Could the Reflation Consensus be Wrong? | The Big Conversation | Refinitiv

TL;DR

The overwhelming consensus for 2021 is a reflation trade, with expectations of weaker US dollar, higher yields, outperformance of emerging market equities, and favoring of low-quality assets. However, there are doubts about whether this consensus is based on true synchronized global growth or just a weaker dollar driving commodity prices.

Transcript

[00:00:05] As we come in to 2021, this chart of US M2 money supply growth is at the very heart of an overwhelming consensus which expects that the combination of a vaccine plus massive fiscal and monetary support will result in a huge rebound in growth and inflation, that will continue to drive demand for reflation trades. But where could this cons... Read More

Key Insights

• ✋ The reflation trade consensus is based on expectations of a weaker US dollar, higher yields, and outperformance of emerging market equities.
• 🪛 However, there are doubts about whether this consensus is driven by true synchronized global growth or just a weaker dollar driving commodity prices.
• 🤑 The surge in M2 money supply and increased savings during lockdown are seen as potential drivers of inflation, but they may not have long-term sustainability.
• 🦔 The reflation trade is largely embraced by active managers and hedge funds, but overall market positioning does not fully align with the narrative.

Questions & Answers

Q: What is the reflation trade consensus for 2021?

The consensus includes expectations of a weaker US dollar, higher yields, outperformance of emerging market equities, and favoring of low-quality assets such as high yield bonds and small caps.

Q: What are the drivers of the reflation narrative?

The surge in M2 money supply, increased savings during lockdown, and demand brought forward from the substitution of services with finished goods and commodities are seen as drivers of the reflation narrative.

Q: Are the reflation expectations based on true synchronized global growth?

There are doubts about whether the reflation trade is based on true synchronized global growth or just a weaker dollar driving commodity prices. The euro positioning is a reflection of a weaker dollar, and the position in the copper futures market indicates growth expectations. However, other positioning in bond markets and precious metals suggests a less extreme view on reflation.

Q: What are the concerns regarding the reflation trade?

There are concerns about the sustainability of the factors driving inflation, such as the surge in M2 money supply and increased savings. Additionally, the demand for commodities and finished goods may decrease as economies recover, and the dollar could strengthen again.

Summary & Key Takeaways

• The consensus for 2021 is a reflation trade, with expectations of a weaker US dollar, higher yields, and outperformance of emerging market equities.

• Other trades aligning with this narrative include high yield over investment grade in the credit space, and favoring of small caps and cyclicals over growth stocks in the equity space.

• The surge in M2 money supply and increased savings during lockdown are seen as potential drivers of inflation, but there are concerns about the sustainability of these factors and the demand brought forward during the pandemic.