We started 2017 focusing on finding out if the acceleration of the cycle of the second half of 2016 was genuine and sustainable over time. The question was key, we came from a deflationary scenario where the financial and cycle risks were not exactly small. Then, among the main factors of this start were: the coup of the central banks, the fiscal impulse in China and the recovery of raw materials. Along with these, we observe the incipient reactivation of the internal demand of the advanced economies and the disappearance of factors that had depressed the economy in recent years (the end of the deleveraging of the private sector, fiscal austerity, European sovereign debt crisis, normalization of financial conditions in emerging countries, shock of raw materials …).

From the start, the strength of the leading indicators, the synchronized acceleration of the developed and emerging economies and, above all, the composition of growth, convinced us of the positive change in the fundamentals and the sustainability of this growth. To the improvement of aggregate demand, led by the recovery of consumption and investment, very favorable financial conditions were added. The high prices of raw materials and the inventory cycle have also supported growth. The faithful reflection of these fundamentals are the recovery of international trade volumes, the sharp rise in demand for crude oil that we saw in the second quarter, the improvement in sales and the good results of the companies.

In summary, the global economy has grown in the second quarter at rates close to 4.4%, the best figure since 2010. For the first time since 2012, the revision of the growth estimates has been upward and we expect additional positive revisions for the second half of the year. Therefore, we believe that this macro table offers a high degree of visibility for the next twelve months.

This scenario, already well known, has gained visibility in recent months and has ended up becoming a consensus. However, a key element is missing, the normalization of monetary policy and with it the return of inflation. The elimination of monetary stimuli would be the demonstration that expansion is indisputable and that the economy is able to stand on its own; Inflation would be a natural consequence of the advance of the cycle and the closing of the output gap.

So far, the inflation figure in recent quarters has not accompanied the recovery momentum, surprising the downside, and still far from the objectives of central banks. The current controversy revolves around changes both cyclical and structural.

On the one hand, there are specific factors that are well quantified, such as telecommunications services and changes in the calculation methodology in the US, or external shocks and the size of the output gap in Europe. On the other hand, structural changes such as the flattening of the Philips curve and the impact of globalization. In my opinion, inflation has reached minimum levels in the first half of the year and the cyclical component will weigh more in the coming months, bringing the figures closer to the targets.

Central banks, led by the Fed, intend to gradually reduce stimulus measures, and although they show the way, they move in their usual range of ambiguity. In June, in a concerted or coincidental fashion, the message of the recent disappointment of inflation was overlooked and focused on the need to advance in standardization. In August, return to the debate on inflation and absolute silence again at Jackson Hole.

In the coming months we will see a change in the guidance of central banks, which will be more concerned with financial conditions and stability than with the evolution of the cycle and inflation. In the US, the idle capacity of the labor market will comfortably exceed the non-accelerating rate of inflation, while in Europe, the closing of the output gap advances rapidly.

In September, we expect the Fed to begin to reduce the balance sheet-and to raise interest rates in December-and for the ECB to present the QE reduction plans.

Therefore, the fundamental elements of our investment scenario for the end of the year are: a robust macro that continues to support the growth of sales and profits of companies, to which is added an improvement in inflation and on the other hand, an advance in the normalization of monetary policy. If this happens, the large positions that have accumulated during the summer buying bonds and selling dollars are likely to turn around.

The markets have been focused on the confusion of American data, the legislative failures of the new administration and the permanent crisis in the White House, and have deviated considerably from the federal reserve guide and from American data showing an acceleration of the economy compared to previous years, while being surprised by the growth and the result of the elections in Europe.

According to this, we must maintain a high exposure to the European stock markets, and in particular to cyclical sectors with sensitivity to interest rates. In fixed income, we will maintain short positions in government bonds and a mix of corporate credit in dollars and euros along with floating bonds.

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