Narrowing the inflation focus
While inflation is high and may be rising in the short term, portfolio managers should be questioning whether it has already been priced into asset prices, according to AMP Capital.
Speaking at an Institute of Managed Account Professionals (IMAP) webinar, AMP Capital senior portfolio manager, Stephen Flegg, said most of the commentary about inflation examined what had happened in the past and whether it was already priced as opposed to whether it would outshoot or undershoot expectations.
Flegg said portfolio managers should investigate what type of inflation was the market experiencing and what was driving it, be it quantitative easing, capacity utilisation, migration, trade bottle necks, fiscal spending or changing consumer behaviour.
“Because there are two very different types of inflation: push and pull. And if it is just trade restrictions pushing up prices, then if we get interest rate hikes… we would expect interest rates won’t be very effective at dulling inflation,” he said.
“Either central banks won’t bother or if they do bother, they are going to have to jack up interest rates very aggressively to get it under control.”
According to Flegg, the general assessment of the managers that AMP Capital worked with was a lot of global inflation was related to capacity utilisation, restrictions on migration and trade bottlenecks.
Further, changing consumer behaviour shifting from services to goods and increased consumer spending following COVID restrictions had driven up demand and caused inflation.
However, Flegg said portfolio managers were viewing these factors as mostly having a transitory impact on inflation, but not all was transitory.
“Some of it will leak into bank structural [and] central banks will have to address that part of it,” he said.
“But when we look at headline inflation in the US, people see 7% and they think that we're in a catastrophe, but really a lot of that will pass through the system.”
He said it was important to look at the Australian inflation context which was “smack bang in the middle of the band for which [the Reserve Bank of Australia] wants inflation.
“In the Australian context, inflation is a little higher than it was, but really, it's still very manageable and in terms of its flow on to interest rates, it should be relatively modest.”
Source: Bloomberg, Macrobond
Source: Bloomberg, Macrobond
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