Aviva Investors: Economy to move towards reflation

Aviva Investors expects global growth to rise gradually, with inflation also set to rise, albeit from historically low levels. With global monetary policy set to remain accommodative, and fiscal policy expected to take a more significant role, the world is expected to head in a more reflationary direction.

This year has been characterised by ever more global monetary stimulus. That has provided a boost to many asset classes, despite the various risks that have materialised. We expect that as global reflationary pressures rise, the prospects for fixed income markets, in particular, become more challenging.

Looking forward, the US is expected to raise interest rates slowly, while other central banks are reaching the end of the road for additional policy stimulus.

Worries about growth in China have fallen during 2016, while recoveries in Europe and the US have continued, albeit at a modest pace. The fallout from the UK’s Brexit decision, as well as upcoming political events including the US presidential election, the Italian constitutional reform referendum and a number of important European elections, have the capacity to upset financial markets. Politics has played, and will continue to play, a key part in investment decisions. The growth of nationalism, rising inequality and a sense of injustice among electorates are themes that look set to continue.

The UK has embarked on a long and potentially bumpy road to EU exit. Growth will be negatively impacted and the inevitable extended period of uncertainty will be a difficult backdrop for households, companies and financial markets.

Japan is at a critical juncture, with the Bank of Japan reshaping its policy framework in a way that points to a closer relationship between monetary and fiscal policy in future. Japan could yet set a new benchmark for unconventional policy stimulus that others may follow.

 Euan Munro, chief executive at Aviva Investors 

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