The “reflation narrative” that has gripped markets since the election of Donald Trump appears to have little basis in reality, says US fund manager MFS Investment Management.
Speaking to InvestorDaily, Boston-based MFS Investment Management fixed income chief investment officer Bill Adams said his firm is "pushing back" against the idea the global economy is about to see a resurge of inflation.
Popular "narratives" related to populism and the election of Donald Trump have helped promote the notion that growth is about to break out of the 2 per cent bounds experienced since the global financial crisis, Mr Adams said.
"We think survey macroeconomic data has been markedly well ahead of actual data," he said.
"When we look on the growth trajectory on a global basis it looks and feels a lot to us like it did before we had the commodity meltdown in 2014," Mr Adams said.
The pricing of the riskiest parts of fixed income markets (that is, high yield) have gotten "well ahead of themselves" as it relates to fundamentals, he said.
"We're not of the mindset that this is recessionary, but that said we look at risk markets and say those risk markets are really pricing in a Goldilocks-like scenario," Mr Adams said.
"It seems to us as if everything needs to go right at this point in time for this level of valuation."
Smart investors should start dialling down their risk budgets, Mr Adams said.
"The marketplace wants to consistently look for the boogie man of inflation, but it's really struggling for explanations for why it's not happening," he said.
MFS Investment Management is firmly in the "lower for longer" camp when it comes to global growth, Mr Adams said.
He pointed to the "three Ds" that will keep inflation constrained: [high] debt, demographics and digitisation.
"Higher debt balances makes the system a bit more fragile and vulnerable to an eventual uptick in interest rates because of the cost of servicing a higher debt balance," Mr Adams said.
"Policymakers have to be cognisant of the proverbial 'policy mistake' as they normalise [monetary policy], and that's going to keep expectations for traditional interest rate cycles lower than they have been in the past."
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