According to Bank of America’s Michael Hartnett, in the coming quarters – especially in the aftermath of the shocking wake up call to the “establishment” delivered by Brexit, one which forced even McKinsey to declare a stunning U-turn on the think tank’s favorable opinion on globalization – investors must prepare for policies to address inequality. BofA believes that there are three ways to trade market “populism”,
From BofA’s Michael Hartnett
We believe the BREXIT vote was the biggest electoral riposte yet to the Age of Inequality. We also suspect the prospect of further electoral success by populists is quietly spurring governments and the corporate sector to activate fiscal stimulus in 2016 to appease voters. Telling examples: Japanese infrastructure spending, a new UK industrial policy, and announcements of higher minimum wages by high-profile US companies. Markets may soon start to discount policy rotation from the exclusive use of QE to stimulate animal spirits (which has failed) to a new policy mix of monetary-stability (central banks keep rates and rate volatility low and stable) and fiscal stimulus.
Tactically, we believe investors looking for exposure to this policy rotation theme should go long global industrials, semis, transportation, Japanese small-cap, TIPS and HY over IG. The duration of this trade will be dependent on the credibility of Japanese/European fiscal stimulus announcements.
Trades for the “War on Inequality”
Our fundamental view is that the need and likelihood of new policies that address the populist desire for a “War on Inequality” remains.
Table 3 outlines the three themes of Redistribution, Protectionism and Helicopter…specifically, the policies entailed, the macro regime induced and the trade ideas for each theme. While we have presented these themes as distinct, in practice there will likely be a degree of overlap.
Redistribution policies would likely boost inflation (TIPS) and low-end consumption (retail, payments, tax services) but at the expense of brokers, luxury, and growth in general; we also like curve flatteners and municipal bonds over taxable fixed income.
Protectionism would suggest an outright deflation portfolio of government bonds, gold, volatility, and quality defensive stocks. We think banks would suffer from capital controls and that multinational companies would be hit hard by trade wars, especially relative to domestically-focused firms.
Helicopter fiscal expansion would likely benefit a reflationary portfolio of TIPS, commodities, banks, and value as growth picks up and the yield curve steepens.
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