Jefferies

Economics and Strategy

Global Equities: A Disinflation Boom

— Sean Darby, Global Head of Equity Strategy

The momentum in global equity markets from 1Q rolled into 2Q with most bourses up quarter-over-quarter. Moreover, fund flows into global equities were robust with Europe experiencing 27 consecutive weeks of solid buying. Interestingly, the breadth of the equity rally is improving with cyclicals enjoying a renaissance with container freight rates, paper and even silicon wafer prices rebounding. Analyst earnings revisions have also moved into positive territory, underwriting many unfashionable sectors.

Despite the lack of follow-through on Trump’s initial proposals, the U.S. is still benefiting from relatively loose monetary policy, M&A activity and a turn-around in corporate profits. With the European election calendar almost over and the fear of a wave of populism now diminishing following Marcon’s French Presidential election victory, investor sentiment is turning bullish coinciding with improving economic data. Although China’s economic data has cooled after a strong 2016, the rest of the emerging markets are enjoying an upswing in data and corporate profits helped by base effect and subdued inflationary pressures.

There are uncannily similar macro conditions today compared to the late 1990s when NASDAQ melted up despite financial crises in EM. G7 Central banks back then ran loose monetary policies helped by disinflation while the corporate sector spent on the disruptive ‘digital economy’. Today, after a series of ‘geopolitical shocks,’ the global economy is growing with subdued inflation and real rates zero. Companies are just starting to spend on ‘AI’ and the ‘internet of things’.

We continue to favor Europe, Japan and selected markets in EM and Asia. After two solid quarters, we would expect equity markets to take a breather as well as undergo some ‘rotation’ between different sectors and countries. But with global economic growth broadening, we would not expect much of a setback.