• Reflation is not inflation. Reflation is primarily about economic growth, of which inflation may play a part and reflation is more than just a rebound off low growth. The economy should reflate beyond the trend levels that existed before a slowdown took hold. Inflation can occur during periods of reflation, prices can rise if the economy is rebounding, but we should maintain a clear distinction between the two. You can also have periods of inflation during which there is no economic growth. If prices are rising in the absence of growth, than reflation may never occur because margins are getting squeezed from the outset. 
  • When the dollar is heading lower, commodities are usually heading higher. When we are talking about economic growth in general, that would mean a gross domestic product (GDP) is rising. And because GDP is lagging data set, risk assets will already make their move by the time of the data release. Therefore you should look at commodities like crude oil, copper and iron ore futures on the Chinese markers as well as Baltic Freight Index which should benefit from reflation. Cyclical stocks, in particular, the early cyclicals such as basic resources and miners should start outperforming growth stocks. We would look for mining stocks and heavy industry to start outperforming. Banks should also outperform because a rebounding economy should offer more opportunities for lending. 
  • Yields are expected to rise as growth picks up and longer-dated yields are expected to rise more than shorter-yields. Bank stocks will benefit from a steepening of the yield curve. The rise in longer-dated yields is often led by a rise in inflation expectations, and this is where we start to see the overlap between inflation and reflation. 
  • When we have true reflation, emerging markets can still outperform even if yields, particularly, dollar-based yields are rising because the economic growth more than offsets the increase in the cost of capital. 
  • But weaker dollar does not always mean growth. A weaker dollar helps to loosen global financial conditions, making it easier for dolla debtors to service and repay their debts. But what if commodities start to rise before growth has started or if yields start to rise too quickly, tutting up the cost of capital at a pace which is faster than the rebound in growth?