Inflation will make a significant comeback in the US and Europe in 2017, according to Managing Partners Group (MPG).
Economic recovery and rises in interest rates and commodity prices will generate greater borrowing and utility costs and spur wage-push inflation of up to 5% in the US and the UK, and between 2.5% to 3.0% in the Eurozone, MPG says.
Jeremy Leach, Chief Executive officer at MPG, commented: “Reflation is expected to be a strong theme in the US in President Trump’s first year and the Fed rate will likely rise in response to 1.25% by the end of 2017. While inflation is usually viewed as the nemesis of central banks, it will actually be a welcome solution for reducing the real value of the enormous debt in Europe.”
Jeremy Leach anticipates that inflation will rise in the UK as a result of a robust economy, house price and rental increases and creeping mortgage rates resulting from a higher bank base rate towards the end of the year.
While stock markets should continue to rise, equities are looking highly valued both sides of the Atlantic and Jeremy Leach expects this will make them vulnerable to a correction. He added: “It is likely that that there will be a significant event in 2017 that will knock markets. This could be an economic event or maybe a shock from the elections in Germany, France and the Netherlands.
“Once again, investors will be looking for assets offering steady income, so short-term debt and asset-backed securities (ABSs) offering 5-6% over three to five-year terms will be attractive because of the inflation-proof returns that they offer.”
Research* commissioned by MPG revealed that 30% of institutional investors expect to increase their exposure to ABSs over the next three years. The most common reason cited for doing so was that they were attractive on a risk/return basis (40%); 30% said they gave better yields than were available elsewhere in the market and another 30% liked the fact they were secured against real underlying assets.
MPG believes the market for ABSs is set to grow exponentially over the next few years in Europe to meet demand from companies in three main sectors – SMEs looking to expand their products and services, operators in the growing FinTech sector and alternative fund managers looking to raise extra capital without creating new shares or units in their products. In all these sectors, which are currently seeing growth in demand for capital, MPG anticipates strong demand for ABSs that are secured on the underlying assets and provide attractive yields for investors.
*Source: Survey carried out among 50 institutional investors globally in October 2016