High inflation calls for investors to avoid ‘buying the dip’

The Russian war with Ukraine will likely hasten the trajectory of stimulus and economic growth fading while input costs are rising, according to MFS.

Rob Almeida, global investment strategist at MFS, said the trend for rising inflation was already underway before the invasion and would now be accelerated by volatility and uncertainty caused by the war.

Inflation in the US was already 7.5%, the highest it had been for 40 years, while household energy bills were rising sharply in Europe.

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This would be particularly evident when considering energy and oil prices.

“As the list of economic sanctions against Russia grows, it stands to reason that the probability of oil and gas market disruptions will continue to increase given that Russia is the world’s largest exporter of natural gas,” Almedia said.

“Any potential increase in oil prices will weigh on global growth and corporate profits. And given the high starting point for inflation (7.5% in the US and over 5% in eurozone), I fear economic models may understate the impact of a further rise on overall inflation.

“In addition to energy, Russia could cut exports for a range of natural resources (including palladium, an input to semiconductors), exacerbating existing supply problems.”

He said the current situation also bucked the trend by being an environment where investors should avoid following the traditional adage of ‘buy the dip’.

“For more than a decade, investors have been conditioned to “buy the dips.” But, until recently, we lived in a low-inflation world that gave central bankers tremendous latitude to come to the market’s rescue.

“With inflation running in the mid-single digits and lower income cohorts having to choose between putting gas in their cars or food on their tables, we no longer live in that world. Inflation is becoming a political issue, and in the current environment, I think central bankers will need to act to aid Main St. (by reining in inflation) rather than Wall St.”

 




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