Inflation rise doesn’t have to be bad for equities


Inflation may rise in the near future as the world emerges from the pandemic, but investors should not expect it to last, according to the guests on the latest FTAdviser podcast.

Phil Smeaton, chief investment officer at advice firm Sanlam, said: “The outlook for inflation is a key focus for us. Asset prices are elevated and valuations are high, but while CPI inflation hasn't risen, agricultural products have risen, commodity prices have risen.

"The market’s key focus is on whether interest rates rise, as that would likely mean asset prices fall, but rates will only rise if inflation goes above the 2 per cent target, and there is no sign of that happening.

"And any talk in markets about central banks tapering the QE policy would be a buying opportunity as they will back off.” 

Gerard Lyons, chief economic strategist at discretionary investment management firm Netwealth, said: “I expect inflation to stay structurally lower for years to come, though given the exceptional environment we are in, there may be a short-term spike, but the further ahead one looks, the more I think the structural force at play will keep inflation low for a long time.”

Simon Edelsten, who runs the Mid Wynd investment trust and other global equity mandates at Artemis says central banks have made it clear they will prioritise the delivery of economic growth, even if that means allowing inflation to rise.

He said this would likely mean a broad based gains in equity markets, a different scenario from the outlook in recent years when only a small number of equities rose meaningfully in value.