Investors chase reflation trades via stocks, emerging assets BAML

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Global investors poured money into stocks, emerging markets and corporate debt in the week to Wednesday, as they continued to chase the Trump-induced reflation trade, data from Bank of America Merrill Lynch (BAML) showed on Friday. Since Donald Trump's U.S. presidential election win last November, investors have bet that his promised fiscal splurge will boost growth and inflation, fuelling a rally in U.S. stocks. Although details of his spending program are still scarce, an announcement on Thursday of a "phenomenal" tax plan over the next few weeks sent all three U.S. stock indices to record highs. "It's inflation-on in stocks," BAML analysts said in a note. "Flows, at least this week, are clearly showing no fatigue in the 'leadership' of the reflation rally." BAML remains bullish on risk assets, the bank added. Investors added $6.3 billion to equity funds in a sixth straight week of inflows, and while U.S. stock funds saw outflows, value-oriented U.S. equity funds attracted $1.9 billion while Japanese equities received $3.4 billion.

BAML said this was the largest week of inflows for Japan since the election. Japanese exporters are expected to benefit from U.S. growth as consumer spending picks up. Investors also poured into emerging markets, with some $2.5 billion of inflows to emerging debt funds, and $1 billion of inflows to emerging equity funds. Together, emerging stocks and bond funds have seen $11 billion in inflows year-to-date, with the benchmark emerging equity index powering to five-month highs.

Emerging stocks have effectively reversed a heavy selloff that they had suffered immediately after Trump's election. Investors had feared his talk of protectionism and scrapping trade treaties would hurt export-dependent emerging economies. Now, however, investors were chasing this "cyclical laggard", BAML said, noting Trump's protectionist threats had so far proved to be dollar-negative. That "has made EM the contrarian Q1 winner", the bank added.

A dip in bond yields triggered buying of investment grade bonds with a bumper $7.6 billion of inflows, the largest since August 2016. High-yield, or junk, bonds attracted $1.9 billion, whilst TIPS funds, which invest in inflation-protected securities, took in $1 billion, their biggest week since Trump's election, the data showed.