China GDP outstripping pre-COVID pace
This week, China reported real GDP growth of 6.5 per cent in Q4 year on, well ahead of consensus estimated of 6.2 per cent. "It marks a very strong end to the year for Asia’s largest economy," Matthew Cady, investment strategist at Brooks Macdonald said, and why the firm has extended its overweight to Asia ex-Japan equities.

"China is the only major economy globally to have seen positive real economic growth in 2020, with real GDP growth of 2.3 per cent year-in-year, vs 2.1 per cent expected.

"What’s remarkable is that the speed of this recovery has come against the context of a global pandemic. While China’s GDP will make the headlines today, what’s really encouraging in the breadth of economic strength which supports the overall picture of economic resilience. In China in December, in year-on-year terms, industrial output is up 7.3 per cent, retail sales are up 4.6 per cent, and fixed asset investment is up 2.9 per cent," Cady said.

Are markets too optimistic about the reflation environment?
"We have been talking about US Treasuries more than any other asset class for some time now, as we think it’s central to the reflation debate and to the behaviour of investments across the asset class spectrum," remarked Anthony Rayner, fund manager at Premier Miton Investors. The chart below shows the US Treasury 10-year yield breaking through the psychologically important 1 per cent mark (blue line below), and equally important perhaps, the US Treasury 10-year break even yield, which measure the market’s expectation of inflation, moved to a two-year high (grey line).

"Inflation expectations have indeed increased swiftly but it would be wrong to say that they have moved to excessive levels," Raynor said. Either way, currently, markets are taking a very positive view of things.

"The market consensus is very positive, with risk-on the dominant narrative. With that, there does seem to be a sense that we have moved on from an “everything” rally. We include ourselves in that group that think bonds might struggle this year, particularly developed government bonds, while other safe havens such as gold might do less well if real yields rise. There is then a healthy side to this, in that diversification could increase in markets, allowing portfolios to be more balanced. Nevertheless, at some point, the debate will likely move on to whether looser fiscal policy leads to tighter monetary policy."