The current state of rising inflation is a pivotal point for markets used to an environment of ‘lower for longer’ as they have not reached these heights since the 1970s, according to Schroders.
Speaking to Money Management, Simon Doyle, chief investment officer and head of multi-asset, said inflation and interest rates could raise further than the market was expecting.
US inflation reached almost 20% in the 1970s thanks to monetary policy which financed large budget deficits. In 2022, US inflation was 7.8% in February and was forecast to reach 8.5% in March.
Doyle said: “The last time inflation was this high was in the 1970s and it was very hard to generate returns in real terms. This is a pivotal point, many people in the industry now won’t have been working during that time.
“There is the potential for rates to go higher than the market expects, it could be higher than 2%-2.5% that the market is predicting.
“We shouldn’t try to convince ourselves that they can’t move much because the market always does something we don’t expect. We need to be open to the possibility of higher rates and more instability than we would like to see.”
The Federal Reserve had begun raising rates, increasing its Fed funds rate by 25 basis points last month, but the Reserve Bank of Australia held rates at 0.1% at its meeting this week.
Doyle said he would like to see more equity weakness in markets as that would be a better environment to invest. This was because a lot of money had been flowing into speculative, unprofitable technology stocks where the price didn’t justify the valuation.
“Whereas now we are seeing good businesses are being rewarded and speculative ones are being left behind. We are returning to a world where pricing is connected to fundamentals again which is much healthier rather than one which is driven by central banks.
“Monetary policy has been the single biggest driver of returns and that is unsustainable.”
