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March 9, 2017, 7:08 a.m. EST

There’s another land of opportunity in the reflation trade — Europe

Banks and life insurers are sectors investors should consider, say strategists

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By Carla Mozee, MarketWatch


AFP/Getty Images
Higher gasoline prices are contributing to a rise in global inflation.

The prospect of higher inflation, driven by plans for Trump administration spending, has lifted spirits on U.S. markets. But there’s another land of opportunity for the reflation trade, analysts say: Europe.

Financial markets worldwide have been lifted by U.S. President Donald Trump’s promise to ramp up fiscal spending and reform taxes. The hope is that these projects will spur economic growth in the U.S. and help drive up inflation.

In anticipation, investors have been buying stocks — sending some global benchmarks to record highs — as well as the U.S. dollar /zigman2/quotes/210598269/delayed DXY -0.05%  . At the same time, they have been dumping safe-haven assets such as bonds, sending yields rising as their prices fall.

Read: Bond market looks doubtful about Trump fiscal stimulus

Just as headline inflation has risen in the U.S., it has marched up in Europe, too. In the eurozone, it jumped to 2% in February, outstripping the European Central Bank’s target. In the U.K., inflation has hit 1.8%, driven to multiyear highs by rising oil prices and a double-digit slide in the British pound /zigman2/quotes/210561263/realtime/sampled GBPUSD +0.2150%  since the Brexit vote.


FactSet
Headline inflation rates in the U.K. and eurozone are at multiyear highs.

Now that global inflation is heating up, an opportunity has opened up for European companies to raise their prices for goods and services, according to Barclays analysts. For some time, businesses had to tailor their pricing to the subdued inflation environment at home, while at the same time having to follow the lead of local competitors abroad.

That added up to “a strong relationship between pricing and developed-market inflation,” especially international inflation, the analysts said.

“With this in mind, if inflation picks up, we think pricing should improve, thereby driving an increase in European profit margins,” the Barclays analysts said. “Even a 2% increase in margins, combined with positive sales growth, mathematically leads to strong earnings growth over the coming few years.”

How to play inflation

Given that prospect, how can investors play the potential European and British reflation trade? Strategists provided some suggestions for funds and exchange-traded funds to consider, focusing on various types of stocks. Financials are one sector they highlight.

“The banks will do well with interest rates rising and inflation rising, and that helps banks because it helps their margins,” said Michelle McGrade, chief investment officer at TD Direct Investing.

“In the U.K. especially, banks have been struggling to get ahead. But as they repair their balance sheets ... they are starting to provide dividends. In the long-term, banks should be dividend cash cows for investors.”

McGrade suggested looking at Old Mutual UK Alpha Fund, which has an overweight position in banks, and Investec UK Special Situations Fund, which has lenders HSBC  /zigman2/quotes/203901799/delayed UK:HSBA +0.86%   /zigman2/quotes/208272822/composite HSBC +0.85%  and Barclays /zigman2/quotes/208409333/delayed UK:BARC +0.55%  among its top five holdings.

Peter Garnry, head of equity strategy at Saxo Bank, also sees banks getting a boost. He suggested the iShares Stoxx 600 Banks ETF /zigman2/quotes/202379457/delayed XE:EXV1 +0.43%  , whose 45 components include Spain’s BBVA /zigman2/quotes/209653399/delayed ES:BBVA -1.02%  , France’s Société Générale /zigman2/quotes/206663756/delayed FR:GLE -0.24%  and U.K.’s Lloyds Banking Group /zigman2/quotes/202285510/delayed UK:LLOY -0.32%   /zigman2/quotes/200709414/composite LYG +0.47%  .

/zigman2/quotes/210598269/delayed
US : U.S.: ICE Futures U.S.
90.74
-0.04 -0.05%
Volume: 0.00
March 3, 2021 2:30a
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/zigman2/quotes/210561263/realtime/sampled
US : Tullett Prebon
1.3984
+0.0030 +0.2150%
Volume: 0.0000
March 3, 2021 2:40a
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/zigman2/quotes/203901799/delayed
UK : U.K.: London
423.75 p
+3.60 +0.86%
Volume: 19.07M
March 2, 2021 4:35p
P/E Ratio
28.27
Dividend Yield
2.55%
Market Cap
£85.58 billion
Rev. per Employee
£257,711
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/zigman2/quotes/208272822/composite
US : U.S.: NYSE
$ 29.62
+0.25 +0.85%
Volume: 1.94M
March 2, 2021 4:00p
P/E Ratio
30.47
Dividend Yield
2.52%
Market Cap
$119.28 billion
Rev. per Employee
$333,047
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/zigman2/quotes/208409333/delayed
UK : U.K.: London
162.22 p
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Volume: 31.04M
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P/E Ratio
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Dividend Yield
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Market Cap
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Rev. per Employee
£332,602
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/zigman2/quotes/202379457/delayed
XE : Xetra Indices
12.11
+0.05 +0.43%
Volume: 352,656
March 2, 2021 12:00a
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/zigman2/quotes/209653399/delayed
ES : Spain: Madrid
4.56
-0.05 -1.02%
Volume: 13.27M
March 2, 2021 5:38p
P/E Ratio
N/A
Dividend Yield
1.05%
Market Cap
€30.60 billion
Rev. per Employee
N/A
loading...
/zigman2/quotes/206663756/delayed
FR : France: Euronext Paris
20.73
-0.05 -0.24%
Volume: 3.32M
March 2, 2021 5:35p
P/E Ratio
N/A
Dividend Yield
2.65%
Market Cap
€16.31 billion
Rev. per Employee
N/A
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/zigman2/quotes/202285510/delayed
UK : U.K.: London
38.88 p
-0.13 -0.32%
Volume: 149.36M
March 2, 2021 4:35p
P/E Ratio
32.40
Dividend Yield
1.47%
Market Cap
£27.63 billion
Rev. per Employee
N/A
loading...
/zigman2/quotes/200709414/composite
US : U.S.: NYSE
$ 2.16
+0.01 +0.47%
Volume: 5.98M
March 2, 2021 4:00p
P/E Ratio
34.12
Dividend Yield
1.47%
Market Cap
$38.51 billion
Rev. per Employee
N/A
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