The reflation trade has gained some momentum lately, prompting J.P. Morgan to consider it a vital factor for equity investors in the coming months.
Affecting positioning in virtually all assets, including everything from stock market timing to sector, style and size allocations, inflation expectations have rebounded from their January lows, noted the firm’s quantitative analyst team.
The consequence of the deflation scare dissipating in February was that equity market leadership shifted from defensive bond proxies to more cyclical assets.
“This was driven by stabilization in oil prices, continued strength in the U.S. labour market, some sign of growing price and wage pressures, improving growth expectations abroad, and the ECB becoming more accommodative,” J.P. Morgan said in a report.
Although deflation fears appear buried for now, the analysts warn that they could easily resurface, particularly if foreign central banks fail to fight it. Other potential deflation drivers could be further pressure on oil prices when the growing inventory glut isn\’t reabsorbed, and if the U.S. dollar keeps climbing because of divergent monetary policies around the world.
The utilities sector is one area J.P. Morgan recommends avoiding with the reflation trade now in position and rate of interest hikes by the U.S. Fed looming. The analysts noted that utilities remain unattractive on a valuation basis, as yields continue to be compressed.