WeekWatch -‘Global markets remained focused on the prospect of higher inflation last week’ May 2021
Global markets remained focused on the prospect of higher inflation last week. Despite lingering concerns about variants of COVID-19, the economic recovery from the pandemic is gathering pace. Investors are now trying to assess what the recovery means for inflation, and how and when governments and central banks will respond.
Data released last week showed that prices in the US in April were 4.2% above those in April 2020, higher than many economists had predicted. This led to renewed speculation about the Federal Reserve (the US central bank) reducing the $120 billion of bond purchases each month that have helped to support equity valuations throughout the pandemic. The expectations are that a resurgence of economic activity will bring higher inflation, eventually causing governments and central banks to reverse the policies that have supported asset prices – and which have gone into overdrive since the pandemic took hold last year.
Equity markets dipped on the news, with US stock market indices ending the week lower despite a rally on Friday. As in previous weeks, the dip was felt most strongly in the technology sector, due to the way that the share prices of fast-growing companies benefit from lower interest rates. With investors expecting interest rates to increase if inflation continues growing, the share prices of large technology companies lowered.
The growth of inflation, and the impact that it might have, is hard to predict accurately, notes Dan O’Keefe of Artisan Partners, manager of the St. James’s Place Global Managed fund.
“We talk about inflation as if it’s this monolithic entity, but it has many different forms. It appears differently in different areas of the economy,” he said. “The analogy I would use is that inflation is not the tip of a spear, which is singular and pointed. It’s more like an army. An army as it advances is disorderly and chaotic,” he added.
He adds that several positions within the fund are poised to benefit from a period of higher inflation. He points out that so-called ‘tollbooth stocks’, which generate predictable revenue thanks to their large networks, can benefit from periods of higher inflation. The companies in Artisan’s portfolio that he expects to perform well in such an environment include American Express, Google and Facebook.
The fact that inflation has been at historic lows for a long time doesn’t mean that investors should expect it to stay low in the future, wrote Mark Dowding of BlueBay Asset Management co-manager of the St. James’s Place Strategic Income fund.
“Investors have become conditioned to expect the norms they have experienced over the past ten years to continue to hold for a further ten. Yet, we have been flagging in recent months that the macro and policy landscape is fundamentally very different to what we have witnessed in the past couple of decades,” he added.
He notes, for example, that a period of higher inflation may now be more attractive to policymakers, due to the way that inflation can help governments to pay down high levels of debt by reducing their value over time. With many countries around the world having borrowed heavily to fund their COVID-19 relief schemes, allowing inflation to grow for a period of time might help them to tackle these debts.
As investors, the best way to deal with uncertainty is to invest for the long term with a set of investments that is well-diversified. If your funds are invested in a wide range of assets, then their performance won’t be overly reliant on any one outcome.
Last week was also notable for something of a U-turn from an executive who has generated plenty of headlines over the past few years. Elon Musk, CEO of electric vehicle company Tesla, said last week that the company would no longer accept the cryptocurrency Bitcoin as payment for its new fleet of vehicles. In a Tweet posted last week, he said that the evidence of the high energy consumption of Bitcoin transactions meant that he could no longer justify its use as a form of payment. This may be frustrating for anyone who had hoped to buy a vehicle with their gains from cryptocurrency. But it also highlights a truth that is becoming increasingly clear: companies can no longer afford to ignore environmental, social and governance (ESG) factors when planning for the future.
Artisan Partners and BlueBay are fund managers for St. James’s Place.
The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.
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The ‘St. James’s Place Partnership’ and the titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives.
Members of the St. James’s Place Partnership in the UK represent St. James’s Place Wealth Management plc, which is authorised and regulated by the Financial Conduct Authority.
St. James’s Place Wealth Management plc Registered Office: St. James’s Place House, 1 Tetbury Road, Cirencester, Gloucestershire, GL7 1FP, United Kingdom. Registered in England Number 4113955.
