Inflation is likely to be more volatile than in previous history, according to Antipodes, as US headline inflation could pass 5% by the end of 2021.
This would be compared to an average of around 2% for the last two decades, based on the firm’s internal modelling.
The rise meant investors would have to consider how much they were willing to pay for bond-like equities which were trading on high multiples. This was particularly the case once inflation passed 4% as, after that point, stocks and bonds sold off together.
Portfolio manager, Rameez Sadikot, said: “Stocks and bonds usually move in opposite directions, but as inflation rises above a tipping point, usually 4% if history is a guide, bond and bond-like equities will sell off together, bearing in mind bond-like equities account for over half of global market cap”.
He said there were “major socioeconomic shifts” which were skewing inflation higher, as well as the pandemic-related pressures. It was also affected by China’s economic changes which had transformed the labour market.
“The pool of low-cost labour that the rest of the world has tapped into is significantly shrinking and at some point, the labour discount will fail to offset risks of globalisation – we could be approaching this point over the next decade, meaning another big deflationary tailwind is behind us,” he said.
“Rising inflation means we need be more selective with the stocks we choose to own. Rising rates are typically a tailwind for low multiple, or value, stocks. Investors should focus on building exposure to resilient businesses that are market leaders, companies which can pass on higher costs to customers.”
