WeekWatch -‘Western financial markets wobbled last week after US economic figures revealed inflation hit 7.5% in January’ Feb 22
Western financial markets wobbled last week after US economic figures revealed inflation hit 7.5% in January.
This is at its the highest level of inflation in the US since 1982 – and prompting fears that households are about to experience a historic squeeze on the cost of living.
Increasing inflation can cause issues for companies, as their costs will also rise. However, Martin Hennecke, Head of Asia Investment Advisory & Comms at St. James’s Place, noted that the effects of inflation can be uneven: “Companies with an edge in the market typically can at least pass on rising input costs to consumers in the form of higher prices charged for goods and services delivered, and hence provide a degree of inflation protection for investors in the long run.
“A report by the Federal Reserve Banks of Richmond and Atlanta published in December confirmed this principle in a Chief Financial Officer survey, which found that “the overwhelming majority (about 80%) of firms experiencing these unusual cost pressures, are passing on at least some of these cost increases to customers through higher prices.”
With inflation continuing to rise, there are mounting expectations that the US Fed will take a more aggressive policy when it comes to increasing interest rates.
However, with economies still fragile as they gradually end their COVID-19 restrictions, central banks are faced with a tricky task. Gordon Shannon, Partner, Portfolio Management at TwentyFour Asset Management said: “Today, central bankers’ task is all the more difficult because inflation isn’t their only concern; controlling it must be balanced against preserving a global economic recovery that is beginning to look more fragile. It is a fine line policymakers must tread, and for investors it raises the risk that central banks could end up being either too dovish or too hawkish.”
In the coming week the UK will reveal its January inflation figures. Although these have been generally a bit lower than the US numbers, they have followed a similar pattern, and will likely point to continued inflationary pressure on the UK economy.
The Bank of England has already raised interest rates once this year, and many are predicting more rates increases will follow given the high levels of inflation. Even if the Bank were to raise interest rates, they remain well below the current rate of inflation.
AXA’s David Page notes that the impact will be felt across households: “Over the coming months, the challenges to real incomes are likely to dominate, National Insurance increases and the utility price hike in April and general price increases are set to weigh on the consumer and provides a challenging outlook for growth. We expect that the drawdown of savings accumulated over the pandemic will bolster consumption – though this is unevenly distributed across households.”
Rising inflation and interest rates have contributed to a volatile market. Whilst some markets and sectors have performed reasonably well over 2022, others have notably struggled. Alex Correia, Senior Equity Analyst at St. James’s Place, says investors should not panic when volatility hits and expect short-term corrections from time-to-time, and that they have historically done little to dampen long term returns on equities.
He adds we are now seeing something of a rotation, where a different set of markets and sectors are starting to perform compared to in the recent past. For example, he notes: “We saw a very pronounced trend where US growth [stocks] had been outperforming the rest of the market over the last five years, but over the last quarter we’ve seen that start change.” Instead, so far in 2022 the FTSE has begun to witness stronger performance.
Correia says this is the time where active managers can prove their worth. He says: “When you have a market that is only moving in one direction, it’s very difficult for an active manager to distinguish themselves and add value. A volatile market with different asset classes or companies heading in different directions is a fertile feeding grounds for an active manager.”
TwentyFour Asset Management and AXA Investment Managers are fund managers for St. James’s Place.
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