Equity Income  

Markets haven't priced in long-term inflation, experts say

Markets haven't priced in long-term inflation, experts say

Financial markets have not yet priced in the impact of long-term inflationary pressures, experts have said.

Callum Stokeld, analyst at Kepler Trust, outlined in a research note released yesterday (September 16) that rising inflation expectations typically see markets shift from long-dated growth stocks towards higher yielding opportunities.

He quoted Thomas Moore, head of the Aberdeen Standard Equity Income Fund, who had said whilst ‘value’ as a sector has recovered somewhat in recent months, ‘high yield’ has only turned into a tailwind in recent weeks (as opposed to months). 

Stokeld added: “This suggests to us that we may only be near the start of any meaningful rotation into higher yield stocks.”

He said much of the initial value rally seen after the announcement of a successful vaccine development was due to a realigning of overall market risk in light of a potential way out of the covid pandemic, rather than positive assessment of individual companies.

The analyst added this meant there was “more room to run for high yield and value” sectors, adding therefore “there could be catch-up potential, especially if inflationary pressures remain.”

Moore outlined ongoing stimulus from central banks would persist, further stoking inflationary pressures. As a result, he said, as well as serving as a likely tailwind to the value style, he believes this will also see the market place greater emphasis and preference for ‘hard’ assets,” for instance commodities.

Yesterday (September 15), the consumer prices index (a proxy for inflation) rose by 3.2 per cent in the 12 months to August 2021, up from 2 per cent in July, the largest ever recorded increase.

However, the Office for National Statistics said this significant increase was likely to be temporary.

The ONS said higher prices in transport, restaurants, hotels and for food and drinks had pushed up CPI, noting that in August 2020 prices in restaurants and cafes were discounted because of the government’s "Eat out to Help out" scheme.

Matt Smith, co-manager of the Ruffer Total Return Fund, pointed out that central banks were not in a position to easily raise interest rates to offset inflation.

“The west is not really built to cope with falling stock markets, let alone falling wages, [and] we have quite a serious debt problem,” he said, adding the answer to that was to conduct a slow deleveraging process through the combination of high inflation and low interest rates.

“It’s exactly the same playbook that you saw coming out of the Second World War. Looking at it from that perspective, it doesn’t really matter if inflation is transitory or not, it never really goes into reverse, which means the erosion of your purchasing power is permanent.”