Risk Wire: Is Global Reflation Sustainable?

The global reflation trade has been in the centre of investor attention lately. One-off factors such as Brexit, commodity price increases due to government policy in China and oil price that rebounded from low levels, could explain much of this reflation. We audit the “trail” of reflation sources and identify a key vulnerability in the reflation narrative. We also introduce two risk scenarios in Mira ABM related to reflation: i) Disorderly Collapse of China’s Economy and ii) Collapse of Oil Price.

There is a modest global reflation unfolding in the last few quarters that has been hailed by investors and regulators as a welcome sign of economic normalisation. Should this process be sustained, it is fair to assume that the long-term interest rates will go back to their historical average values, thus putting an end to the era of financial repression.
Before getting too excited, we checked the source and sustainability of this reflation. Under normal circumstances, reflation is a reliable sign of improving economic outlook and earnings. In this issue of Risk Wire, we try to identify the sources of reflation in so far as positive earnings dynamics are concerned. We zero in on a key weakness of the reflation narrative and develop two “contrarian” scenarios for LINKS Mira ABM: “Disorderly Collapse of the Chinese Economy” and
“Oil Price Collapse”.

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