Should investors be now equipped to handle ‘Trumpflation’?

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Australian Economy, Chinese Economy, US Economy

 

‘Trumpflation’, the new buzz word, recently coined by market strategists, relates to inflation which is speculated to be witnessed under Donald Trump’s US presidential administration. Primarily, the markets are strongly sensing higher inflation to be on the cards. With the Trump election victory, the first signal of rising inflation came in from the record rise in inflows to Treasury Inflation Protected Securities (TIPS), which in a way relates to the consumer price index (CPI). There has been a massive selling activity with regard to the long-dated benchmark bonds in the US and Europe since the presidential election outcome and the 30-year US Treasury yields have gone up 48 basis points to 3.1 per cent. The planned spend of about $1 trillion on infrastructure projects over ten years by Trump administration, tax cuts to help raise after-tax incomes, expected rise in import prices and other such moves, seem to be the inflationary drivers leading the economic movement in the above direction. There is a likelihood that the the deficit spending will be raised while the burden of stimulus might be shifted from the monetary policy to the fiscal policy. This overall scenario will fuel in for higher interest rates in the US but the situation would be bad for the bonds owned by many investors. In fact, many professional investors have pulled out money from bonds and gold in the month of November at a rate which has been the fastest as seen in last few years and promptly heaved the same into equities (as per a latest survey by Bank of America-Merrill Lynch).

 

Investors should thus ideally think about having a mix of assets considering these unforeseen circumstances, and it is noteworthy that equities take a front seat in such tricky situations related to higher inflation. Companies delivering consistent growth irrespective of the economy gain a lot of traction. A glimpse of such a scenario was also seen on ASX on December 06, 2016, when bond proxies were seen to be selling off. Bond proxies including Sydney Airport were down initially but geared up in the second half of trading session. In fact, utilities sector also suffered few burns with DUET Group falling by 1 per cent. On the other hand, Downer EDI Ltd was up a little and QBE Insurance moved up about 2.4 per cent. Even miners (except gold) and banks performed well. For instance, BHP Billiton moved up 1.2 per cent while banks like Australia and New Zealand Banking Group Ltd were initially up about 1 per cent. Although the high inflation scenario is a speculative one, as of now, it may be time for the investors to look for smart entry points in equity market to capitalize well on the upcoming situation.


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