Two just-published reports form MRB highlighted several areas where we disagree with the consensus.
One report examined our disagreement with the prevailing views on inflation and debt/leverage. The consensus sees inflation returning to 2% or less once the volatility associated with economic re-opening peters out. Meanwhile, there is widespread belief that any interest rate cycle, assuming one eventually develops, will never last very long as high debt burdens would soon undermine economic activity. We disagree on both counts, and the report provided analyses on our non-consensus views.
Also, last week we updated our view on the U.K. equity market. This bourse has been out of favor for two decades, having massively underperformed global benchmarks. However, many of the structural drags should abate as the global economic recovery progresses. From a 6-12 month standpoint, the U.K. market offers the appeal of a gathering earnings recovery alongside cheap valuations. Less favorably, the market has limited pro-cyclical exposure outside the energy and materials sector. However, after a long bleak period, the earnings outlook is finally brightening for the financial sector, which should catalyze a re-rating. Financials should be a clear positive for the overall market on a 6-12 month and multi-year horizon.