US: How sustainable is the reflation trade? – HSBC

In view of the analysts at HSBC, since the US election the reflation trade has made a comeback on the back of a prolonged US cycle view but they believe hard data needs to follow this reflation trade view.

Key Quotes

“As US asset price inflation takes the rest of the world with it we look at some of the indicators we feel investors should monitor if they want to keep a close eye on the nuances of this particular cycle.”

“The discrepancy between economic realities and financial market expectations is the main issue.  Unless we start to see a significant pickup in hard economic growth data, rich valuations in assets markets may prove an unsurmountable obstacle.  From an asset allocation perspective we would suggest some caution is warranted for the global reflation trade.  Survey data has been overly optimistic in the past and protectionist policies may tilt risks from Reflation to Stagnation (slower growth but still positive inflation momentum) – an ominous transition for asset markets.”