Expect higher inflation and higher growth than the consensus, says Unigestion in its investment outlook report for February.

That’s because the stars are aligned for sustained global growth, driven by commodities, overcapacity in the global economy and global costs.

Specifically, the previously weak oil market is stabilizing, global wages are strengthening and labour costs in China are rising, all of which support global inflation. Further support is provided by the rising U.S. dollar.

But, in order to see a period of sustained inflation, “the world needs positive growth momentum across all regions,” says Unigestion. “We believe we have reached that point.”

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Unigestion expects growth to result from government spending programs, which should lead to a normalization of investment across the developed world. Further, spending tends to be a rallying cry for populist parties, and this year will see several elections around the world with such parties.

Emerging markets are also on an improving track. That’s because of the rise in commodity prices, the stabilization of the U.S. dollar and the boost in demand in China as a result of that country’s fiscal stimulus and exchange rate adjustments.

The final caveat — by now an oft-repeated refrain — is to beware a potential trade war if the U.S. slaps tariffs on imports. While that would hurt emerging markets, and perhaps China especially, it won’t derail emerging market recovery, says the report.

Where to invest now

With the stage set for inflation, here are Unigestion’s calls for investments:

  • Be overweight inflation-linked bonds and commodities (industrials and energy). Their fundamental fair value is significantly above current levels.
  • Be underweight sovereigns. In particular, underweight Europe, where sovereigns are furthest from fair market value because of low inflation pricing and the scarcity of short-dated paper.
  • Go long on growth assets while keeping an eye on political risk. Unigestion’s preference is for developed and emerging equities at the expense of credit.

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The increase in equity valuations after the U.S. election was largely from multiple expansion, says the report, similar to what happened after Brexit. “This ‘buy the rumour, sell the news’ pattern could repeat in 2017.”

Thus, investors may need to add some cost-effective foreign exchange or defensive value hedges to equity positions along the road to year-end.

Read the full report here.