The potential for further US dollar depreciation and a recession Stateside lead this month’s Investment Bulletin, but there are also striking opportunities in the UK market highlighted.
Fears around inflation and further Brexit troubles may abound, but this month’s experts are keen to temper the panic and offer potentially attractive options for investors seeking opportunities amid the gloom.
Reasons are given for why a lower terminal rate of inflation relative to market expectations could transpire
A range of investments likely to do well while inflation persists are flagged, with the focus on commodities
Investors are warned of further potential portfolio implications stemming from Brexit and the Northern Ireland Protocol
Absent new shocks, we believe inflation should peak this year. The latest US figures show a slight deceleration, though one data point doesn’t make a trend and we’d need more evidence to call the peak. We’re not saying that the price of goods and services will fall. Rather, we expect the rate of increase in prices (which is inflation) to slow.
Take oil: its price went from 15 dollars per barrel at some point last year to 115 currently – a 666% increase. Now, imagine that it stays at 115 dollars. After 12 months, that’s a 0% change. What’s more, demand is normalising – as wage growth, measured by a smoothed version of average hourly earnings, has been decelerating sequentially for four months. The fiscal impulse has waned. Interest rates, from record lows, are rising and money supply growth is slowing. And, while things haven’t improved that much on this front just yet, supply will eventually expand, pushing inflation down. Given the supply-driven nature of the inflation spike, we think interest rates, while likely to rise further, should stay lower than in past cycles.
We think we’re likely to settle at lower inflation rates than currently, but not as low as previously. Technological innovation and ageing societies remain formidable disinflationary forces
We don’t expect inflation to get back to the very low pace of the 10-15 years prior to the pandemic. That was a period characterised by austerity and balance-sheet repair, compressing demand and keeping a lid on inflation. We think we’re likely to settle at lower inflation rates than currently, but not as low as previously. Technological innovation and ageing societies remain formidable disinflationary forces. The “green transition” and more local supply chains could be medium-term inflationary. In the short term, rising food prices could be a risk. The liquidity cycle is tightening, but we think we’re approaching maximum hawkishness as a lot is already priced in. We expect a lower terminal rate relative to market expectations.
Chief Economist and Macro Strategist at Quintet Private Bank (parent of Brown Shipley)
UK inflation has hit 9%, US 8.3% and Euro area inflation is expected to be 8.1% for May; this is a challenge for investors, where typically investors into UK equities have seen long-term returns of about 7.5% per annum, or about 5% more than long-term inflation at 2.5%.
Energy and commodity focused stocks have done well in this environment, as have more defensive sectors such as large pharmaceutical, consumer staple, and commercial property investments. Although we may be nearing “peak” rates of change in inflation, the root causes of the problem are as much to do with structural failings in investment over recent years, so it seems likely that inflation may remain higher for longer – but perhaps not at current levels.
Therefore, the positive trend in raw materials prices should be firmly underpinned; portfolios should have some exposure to mining, (including gold as a “hard” currency, copper, and lithium for energy transition), energy (especially gas production), and also food and agricultural production investment for the likely long-term structural pressures, as land use is diverted to growing trees and solar farms whilst global warming impacts production generally.
The NASDAQ (a growth-orientated index) has fallen by 30% from its peak; growth companies, with their characteristically strong product lines, robust margins and positive cash flows will remain attractive investments, and this de-rating for the sector is beginning to expose some “value”; however, there would seem to be no hurry to invest.
Private Clients Investment Director at Tyndall Investment Management
Loath as I am to do so, I must return to the interminably tedious subject of Brexit.
Aside from musing about the politics at play, we all must think about what the most likely path will be ahead, as getting this wrong could lead in the first instance to a trade war with our largest trading partner and, possibly, the cancellation of the current Trade and Cooperation Agreement (TCA).
From experience, I would suggest that a good rule of thumb when thinking about the next steps in this political saga is that a leopard does not change its spots. This suggests the EU will stick to its position – no renegotiation of the Northern Ireland protocol. As for the UK, when reaching the breach in past negotiations with the EU, it is worth remembering that it has always stepped back.
As for what all this means for investors in UK assets, it is likely that the political risk premium applied to sterling, gilts, and to a lesser extent the UK equity market, will remain
However, I’m afraid any decision will not be made on the basis of economics; it will depend on how the political winds are blowing at the time. Questions over the Northern Ireland Protocol will be kicked into the long grass if the government feels secure. If not, we should be prepared for the UK government to take things to the next level.
As for what all this means for investors in UK assets, it is likely that the political risk premium applied to sterling, gilts, and to a lesser extent the UK equity market, will remain. This does not mean that the UK cannot perform well within a portfolio. Indeed, the UK equity market, given its current value bias, is one of our most preferred markets. But for sterling, an undervalued currency in normal circumstances, further politically driven volatility is likely.
Economist at UBS Global Wealth Management
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.