“In an environment of falling prices, shrinking demand and deflated economy, pump-priming efforts and interest rates slash by the governments are among the efforts to ultimately create job opportunities and boost consumer confidence,” RHG Research Institute Sdn Bhd chief economist Peck Boon Soon said.
Among the stocks that would be of focus are construction and commodity-related ones that stand to benefit from the surge in infrastructure spending. In fact, investors are already readying themselves for the next phase of rising asset prices and inflation.
Supporting the reflation theme, AmInvestment Bank Group regional head for equity research Benny Chew said Malaysian companies that would benefit from reflation included IJM Land Bhd, Ann Joo Resources Bhd, IOI Corporation Bhd and SapuraCrest Petroleum Bhd.
“Investment strategy would be based on the reflation theme for now,” Chew told The Edge Financial Daily. He also said rising 
asset prices were good, as house and other asset prices had been depressed long enough.
Economists define reflation as a cure for deflation, where expansionary fiscal and monetary policies are implemented to boost the level of economic activity in the country. The efforts are then manifested in the marketplace through rising asset prices followed by an economic rebound.
The US Federal Reserve had taken significant steps to revive the economy and stabilise the financial system where it had virtually lowered interest rate to zero and is on track to pump more than US$2 trillion (RM7 trillion) into credit markets.
So far, efforts by the Fed Reserve seemed to have a positive impact, as the indices of leading indicators had risen 1% in April, its first increase in seven months. Closer to home, Japan reported a jump in its industrial output, which rose 5.2% from the previous month.
The Japanese government had revised its overall monthly assessment of its economy, on the grounds that the rate of slowdown had moderated with better industrial production and exports data.
So even though global economies faced an uphill struggle coming out of the global financial ice age, forward-looking investors are looking to the time when the fruits of efforts by central banks and governments could be seen.
Malaysia is now likely to be in a technical recession as the economy contracted 6.2% in the first quarter this year. However, analysts and economists opined that economic growth would be positive in the fourth quarter, driven by improved commodity prices, better labour market conditions and better global economic conditions.
Evidence of the reflation strategy showed up in the surge in prices for commodities including crude oil, up 18% year-to-date, copper, steel, zinc, as well as crude palm oil (CPO) prices, which were up 47% from its Oct 28 low of RM1,331 a tonne.
The rise in copper, steel and other metals were partly driven by China, which had pledged nearly 75% of its US$586 billion (RM2.05 trillion) fiscal package to infrastructure development. Copper, which is primarily used in power generation and construction, surged 44% while zinc climbed 24% from its low.
While investors were looking out for better days in the reflation period compared to the recessionary period, they would also have to look out for accelerating inflation, Peck said.
“When reflation efforts and money are going into commodities, instead of focusing on boosting demand and creating jobs, then the pick-up in commodity prices would see input costs and inflation rate go up,” he said.
Despite fears of rising inflation and costs, in the immediate and near term, reflation would be a welcome relief to most vis-a-vis recession and deflation.
This article appeared in The Edge Financial Daily, June 1, 2009.