Pictet Perspectives: Outlook for 2017 – Investing in a Reflationary Environment

As we usher in 2017, economic landscapes worldwide reflect significant shifts, driven in part by political decisions, evolving monetary policies, and renewed optimism in growth prospects. The Pictet Group’s investment outlook for the year emphasizes these changes, particularly the emergence of a reflationary environment moderated by the complex intricacies of global finance and geopolitics.

Understanding Reflation

Reflation refers to the policy measures implemented to stimulate the economy and counteract deflation—either through government spending, tax cuts, or monetary easing. In recent months, we have observed a series of factors that may contribute to reflationary pressures. These include increasing commodity prices, particularly oil; anticipated fiscal stimulus from various global governments; and a shift in central bank policies geared towards sustaining economic recovery.

The election of Donald Trump in the United States heralded promises of fiscal expansion, primarily through infrastructure spending and tax reform. Similarly, in Europe and other parts of the world, governments are beginning to recognize the importance of fiscal measures in supporting growth, suggesting that reflation may become a global theme.

Implications for Investors

In this context, investors need to recalibrate their strategies to navigate this increasingly dynamic investment terrain. Here are several key considerations for investing in what is projected to be a reflationary environment:

1. Equities Over Bonds: Historical data suggests that equities tend to outperform bonds during periods of reflation. As growth expectations rise, so too do corporate earnings potential. Hence, equity markets, particularly those connected directly to sectors poised to benefit from increased spending (such as industrials, materials, and consumer discretionary sectors), should be prioritized.

2. Sector Rotation: Investors may want to look closely at sectors that are sensitive to inflationary pressures. Financials, particularly banks, may benefit from rising interest rates, which can improve net interest margins. Similarly, commodities and natural resources could see gains driven by rising demand and inflationary pressures.

3. Geographic Diversification: The reflation narrative may not be uniform globally. Emerging markets, particularly in Asia and Latin America, may witness improved exports and economic performance if developed economies recover. Hence, international diversification could become a critical strategy—capitalizing on growth potential in regions benefitting from a global economic upturn.

4. Real Assets and Inflation-Protected Securities: As inflation rises, real assets such as real estate, infrastructure investments, and commodities often provide a hedge against inflation. Additionally, inflation-linked bonds (such as TIPS in the U.S.) can offer protection through periodic adjustments to interest payments based on inflation rates.

5. Thoughtful Fixed Income Strategies: While bonds may underperform in a reflationary landscape, not all fixed income investments are equal. Shorter-duration bonds may reduce sensitivity to rising interest rates, and investors might consider high-yield or emerging market debt for improved return prospects against a backdrop of heightened economic activity.

Strategic Considerations

While the broader economic indicators point toward reflation, investors should remain vigilant and adaptable. The interplay of geopolitical risks, policy changes, and monetary interventions can introduce volatility. Political uncertainty in various regions, potential trade tensions, and shifts in central bank attitudes could all influence market dynamics.

In 2017, staying informed and engaged will be paramount. Utilizing insights into flexible and diversified investment strategies can optimize portfolio performance amidst a shifting backdrop. As demonstrated by the Pictet Perspectives outlook, carefully navigating this environment with foresight and strategic intent can ultimately reward adaptive investors.

Conclusion

The year ahead offers both challenges and opportunities for investors. A reflationary environment—which has its roots in political, economic, and monetary developments—demands a robust, well-informed approach to investing. By embracing the unique dynamics of 2017, characterized by expectations of growth and inflation, investors can strategically position themselves to capitalize on the myriad opportunities that lie ahead.

LEARN ABOUT: Investing During Inflation

REVEALED: Best Investment During Inflation

HOW TO INVEST IN GOLD: Gold IRA Investing

HOW TO INVEST IN SILVER: Silver IRA Investing