U.S. election sparks 'violent rotation' to inflation plays: BAML

U.S. election sparks 'violent rotation' to inflation plays: BAML

LONDON (Reuters) - The U.S. election has sparked a "violent rotation" into assets like industrial commodities and inflation-linked securities on a wave of bets that a U.S. fiscal splurge will boost inflation, Bank of America Merrill Lynch said on Friday.

Donald Trump's election and his expected focus on tax cuts and higher infrastructure and defence spending is fuelling a switch out of "deflation winners" - assets that found favor during the era of near-zero interest rates and austerity, it said.

"The U.S. election has sparked a violent, tactical capitulation, out of deflation plays to inflation plays, out of ZIRP (zero interest rate policy) winners to fiscal winners," BAML strategists, led by Michael Hartnett, said in a note.

Treasury Inflation Protected Securities (TIPS) which are indexed to inflation, have enjoyed their largest eight-week inflow on record, attracting over $5 billion, whilst commodities and equities also proved big gainers in the week to Wednesday.

Although this rotation has been observable since early 2016, BAML said the U.S. election marked the moment the switch accelerated, with the bank's U.S. election flash fund managers survey showing that investors tentatively viewed the election as a "game-changer".

Some 46 percent of respondents in the BAML poll thought Trump was most likely to pass a tax repatriation/infrastructure spending bill in the first 100 days.

Commodities funds attracted $1.5 billon inflows in the week to Wednesday, the largest in 14 weeks, BAML said, with commodity prices jumping on the back of Trump's plans to fix U.S. roads, bridges, schools and hospitals.

Copper is eyeing its biggest weekly rally in 35 years and iron ore is heading for its biggest weekly gain on record, helped by a rosier outlook for Chinese demand.

Equities funds attracted $8.9 billion, the most in 17 weeks, but some $200 million was pulled from bonds, creating the largest equity to bond flow differential in a year, BAML said.

In particular, investors withdrew money from emerging market debt funds for the first time in 19 weeks, and from investment grade bond funds for the first time in 16 weeks, with outflows of $73 million and $300 million, respectively.

Meanwhile, U.S. equities attracted $5 billion, their largest inflows in 17 weeks, Japan equities pulled in $4.8 billion, their biggest in 14 months, and emerging market stocks attracted $400 million, the most in 19 weeks.

Healthcare stocks enjoyed their largest inflows since October 2015, attracting $700 million, but European equities continued to suffer outflows, with some $1.3 billion redeemed.

(Reporting by Claire Milhench; Editing by Jamie McGeever and Toby Chopra)