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Cancellation Risk – the risk that if you decide to cancel the investment after assets have been purchased you could lose some of your money if the market(s) or asset(s) to which your contract is linked have fallen since the purchase date.

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Inflation Risk – the risk that inflation will reduce the real value of your investment over time.

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Meteor Insights

The Reflation Trade

The Office for National Statistics released new data recently that shows that Britain’s economy shrank 9.9% in 2020. Despite mounting a small recovery in December, this is still the worst annual contraction since records began

The Office for National Statistics released new data recently that shows that Britain’s economy shrank 9.9% in 2020. Despite mounting a small recovery in December, this is still the worst annual contraction since records began.

It’s a pretty damning statistic but some economists have been relatively optimistic about the recovery effort. Just recently, the Bank of England forecast a “rapid recovery” as vaccines are rolled out at a pace. Equity markets around the world are also soaring, especially in the US where the main benchmarks are notching new highs regularly.

At the heart of this investor optimism is the reflation trade. Essentially, this is the expectation of a swift economic correction after a hard bruising. When vaccine hopes came into focus late last year, investors jumped into assets that tend to benefit in an improving economy. This usually includes sectors such as banks, commodities and energy but this time around, we also have airlines, travel and leisure companies that could benefit from a normalisation. Adding fuel to the fire is the continued accommodative attitude of central banks and the newly elected US President’s stimulus plans.

Although reflation tends to casually refer to the rate of growth rather than actual prices, there’s certainly evidence to show that we could start to see inflation in some sectors too. House prices, for example, have started to tick up with widespread home-working triggering an escape to the country. In June and July, statistics from Rightmove show that there was a 126% increase in people considering properties in village locations. Salesforce, one of the largest customer relationship management service operators in the world, is the latest in a long line of familiar corporate names to announce a permanent “work from anywhere” policy.

Recovery, change and hope looks set to be the key themes for the coming months and investors are piling in. Even the Pound is at its most valuable against the Dollar since 2018. Momentum is, therefore, strong, but there are risks behind the reflation trade. For example, the recovery may already be priced in. Infection counts are also still very high and, in many areas, growing. It could also be premature – overly optimistic projections could be proven wrong.

Advisers who are looking for a balance between giving their clients participation in UK and US equities with potential downside preservation features can now apply for the FTSE/S&P Kick Out Plan March 2021. This product can pay 8.75%pa and has a capital protection barrier of 60% of the Opening Levels of the FTSE 100 and S&P 500 index. Speak to a member of our sales team at for more information.

Posted: 16 February 2021
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