Low inflation is here to stay, which should benefit equities in general, withgrowth-sensitive companies with poor pricing power likely winning the most,reckons Macquarie.
"The fact that low inflation expectations are more deeply entrenched, andinflation itself therefore more stable, is a very positive outcome. It meansthat inflation is less sensitive to cyclical outcomes, so even once demand doespick up and the developed world output gaps close - a point that is still a longway off - the inflation response is likely to be fairly muted," Macquarie'sanalysts write.
"Low and stable inflation is very good for equities - it means the economiccycle is less volatile than otherwise and corporate profits are likely to remainrelatively healthy," they add, noting that low inflation is also likely to keepa lid on bond yields, in a further boon to stocks.
Macquarie recommends looking at cyclical stocks with a low but positive netinterest margin - an indication of their pricing power - which look cheap bothon earnings and book value metrics.
European stocks which pass the screen include BP, OMV,Bouygues, Alstom, Fiat Industrial, Neste Oil, Lufthansa, Voestalpine, Repsol,Lagardere, Metso, Prysmian, Vinci andRexam.
Reuters messaging rm://antonina.vorobyova.thomsonreuters.com@reuters.net