Sahil Mahtani, Strategist, Ninety One Investment Institute, discusses increased inflation risk during the year ahead.
For the first time in years, inflation pressures could be building. We haven’t had a sustained period of price rises for years and contrary to some, we believe the coronavirus might be the catalyst that finally lets inflation loose. Now is the time that investors should think through the portfolio implications of a more inflationary environment.
Nevertheless, conditions are quite different now in the wake of COVID, than those experienced after the Global Financial Crisis (GFC). A decade of subdued inflation which followed explains in part why many investors are sanguine about the inflation outlook now. We see a significantly higher risk of inflation in the coming 10 years than was experienced during the last 10.
We believe that inflationary pressures are building due to a combination of factors. As governments are trying to deal with the immense economic and social challenges of the pandemic, we have witnessed recovery-motivated monetary expansion and shifts in government and central-bank policy. Additionally, in some countries deflationary demographic effects are weakening; while the retreat from globalisation (which for many years has held down prices by shifting production to low-cost locations) may also fuel price rises.
Combined, these factors could finally unleash the inflationary consequences of the money-supply expansion following the GFC and the coronavirus pandemic. Albeit we think inflation will take some time to develop and we do not expect the soaraway prices of the 1970s. Additionally in our view, inflation looks more likely in the US than in other major economies, given the stronger deflationary headwinds in Japan and the eurozone, and China’s more balanced inflationary outlook.
As the chances of inflation taking hold in the next decade are significantly higher now than they were in the wake of the GFC, we urge investors to keep a close eye on inflationary dynamics and think through the portfolio implications of a more inflationary environment.
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On the up: what would inflation mean for investors?
· Flexibility is key in an inflationary environment: John Stopford, Head of Multi-Asset Income
· Gold and gold stocks could prove useful if inflation takes hold: George Cheveley, Portfolio Manager, Thematic Equities
· Quality companies retain advantages through the cycle: Clyde Roussouw, Co-Head of Quality
· Tilt towards higher-yield, higher-risk fixed income and EM currencies in an inflationary environment: Peter Eerdmans, Head of Fixed Income
· When inflationary pressures have developed, in ‘the second phase’ we could see a more sustained rotation towards cyclical stocks: Iain Cunningham, Portfolio Manager
· Value and momentum factors likely to strengthen in a rising inflation environment: Christine Baalham, Portfolio Manager, 4Factor Equities
Follow this link to hear from a variety of Ninety One’s portfolio managers about the investment implications of a more inflationary environment.