This month:
Expert investment views:
The possibility is raised of an easing of inflationary pressure as we progress through 2022
Savers are warned that structurally higher inflation may be something to strategise for long term
Investors are urged to look more at individual companies, rather than macroeconomic factors and interest rates, when assessing equities
Featuring this month’s experts:
1. Will inflation be the fulcrum for financial markets going forward?
Insights from:
As we moved into the final quarter of 2021, we at Punter Southall Wealth felt strongly that inflationary pulses would set the tone for markets through the remainder of this decade.
What was interesting was that at the end of last year, even though headline inflation rates screeched higher through 5% in the UK, US and Europe, markets simply didn’t care. Traditional market sensitivities to inflation went into reverse and left us scratching our heads as to why the expected patterns failed to appear. Part of the answer was, again, liquidity; there was so much money sloshing through markets that no inflation-sensitive asset sold off.
Our view remains that inflation will remain higher than we have become used to in the post-financial crisis years since 2008. Wage settlements are comfortably higher, price pressures in supply chains persist and commodity prices remain elevated
The other factor was timing, and it is obvious that the inflationary impact upon markets was delayed, with the start of 2022 being grim for those normally negatively exposed investments (such as long-duration government bonds and expensive “growth” equities) that performed surprisingly well in the inflationary conditions at the end of 2021.
If we’re right and inflation is the fulcrum for financial markets in the period ahead, what happens next? Our view remains that inflation will remain higher than we have become used to in the post-financial crisis years since 2008. Wage settlements are comfortably higher, price pressures in supply chains persist and commodity prices remain elevated. In the short term, however, we are questioning whether we will see a whole year of inflationary angst, as there should be some soothing of inflationary pressures as we progress through 2022 – which does raise questions over whether central banks are right to be suddenly talking tough on inflation.
Tom Becket
Chief Investment Officer at Punter Southall Wealth
2. Changing inflation expectations
Insights from:
As 2022 begins, there is talk of a new investment era. While this has centred on the changing direction of monetary policy, we believe that the changing inflation expectations are one of the other shifts that could change the market environment as we look ahead.
Older generations can remember the grim reality of inflation in the seventies and eighties. They will have seen first-hand its power to erode spending power, to destroy wealth and to hurt corporate profitability. They will also remember the social pain of tackling inflation, with interest rates hitting 17% in 1979.
For subsequent generations, inflation has been a non-issue. A confluence of factors, including technological progress, globalisation, demographics, and the rise of Chinese manufacturing, has ensured that the inflationary genie has remained firmly in its bottle. While investors understand the risks of inflation, it’s not something anyone under 50 has had to experience or plan for.
The current high levels of inflation are unlikely to be sustained. However, it may be structurally higher than in recent history
That may be changing. The factors that have kept inflation suppressed are shifting: China is becoming more isolationist, the demographic impetus is slowing, reshoring and shorter-supply chains are raising the cost of goods. This could be a shock: the people in charge have already shifted from those who understand inflation to those who have never lived through it (Rishi Sunak was born in 1980…). Will they respond effectively to a different environment?
There is no need to panic about inflation. The current high levels of inflation are unlikely to be sustained. However, it may be structurally higher than in recent history. Savers have become increasingly aware that they need to preserve the purchasing power of their retirement pots, but this may become crucial as the environment changes.
Ben Kumar
Senior Investment Strategist at 7IM
Top Tip
Lee Goggin
Co-Founder
3. When earnings season and changes in monetary policy collide
Insights from:
In the first three weeks of the year, the story behind equity moves was all about high inflation and rising interest rates. During the next two weeks, we saw significant shifts in stance from the Federal Reserve and the European Central Bank, as well as a rate rise from the Bank of England. However, these changes in monetary policy coincided with the results season. This gave us as a timely reminder that equity markets and sectors are far from homogeneous; often what really matters is the performance of individual companies.
The dispersion of returns following results was dramatic: Meta Platforms’ (formerly Facebook) results disappointed, which led to a 25% fall after the results. The drop in share price wiped off around $250 billion of the market capitalisation and is said to be the biggest one-day fall in history, about the same as Shell’s total size. The Amazon share price was dragged down 7% after the Meta move, but after the close that day Amazon reported better than expected numbers and their share price rose 14% in overnight trading. PayPal also disappointed and fell around 25% in a day. On the positive side, Alphabet (formerly Google) and Apple had better than predicted results and rose significantly on their results.
Macroeconomic factors and interest rates can affect the way we assess value in equities but, in the long run, investors should concentrate on individual companies and their ability to compound returns over time
These individual company results from huge companies can drive big intraday swings in markets. These are large moves, but they are short-term and their significance can be over-emphasised. Macroeconomic factors and interest rates can affect the way we assess value in equities but, in the long run, investors should concentrate on individual companies and their ability to compound returns over time.
Jonathan Marriott
Chief Investment Officer at LGT Vestra
Important information
The investment strategy and financial planning explanations of this piece are for informational purposes only, may represent only one view, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
We always advise consultation with a professional before making any investment and financial planning decisions.
Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.
