Wellesley WeeklyWatch – US inflation exceeds expectations

18 May 2021

Stock Take

Inflation anticipation

Last week, global markets kept the probability of higher inflation firmly in the spotlight. In spite of persistent apprehension about COVID-19 variants, the economic recovery from the pandemic is gaining momentum. Investors are now in the position of weighing up what impact the recovery will have on inflation, and how and when governments and central banks will react.

Data released last week revealed that prices in the US in April were 4.2% higher than those in April 2020 – exceeding what many economists had foreseen. This resulted in further speculation about the Federal Reserve (the US Central Bank) dialling down the $120 billion of monthly bond purchases that have helped maintain equity valuations during the outbreak. Restored economic activity is anticipated, and with it higher inflation – eventually leading governments and central banks to perform a U-turn on policies that have supported asset prices, and which have worked intensely since the coronavirus outbreak last year.

Equity markets slumped on the news, with US stock market indices closing the week on a lower note, even following Friday’s regrouping. As has been the case in recent weeks, the tech sector felt the drop the most – all because of the way that the share prices of fast-growing companies favour lower interest rates. With investors expecting interest rates to upturn if inflation carries on growing, the share prices of large technology companies dropped.

Dan O’Keefe of Artisan Partners, Manager of the St. James’s Place Global Managed fund, notes that the growth of inflation, and the knock-on effect it might have, is difficult to predict with accuracy:

“We talk about inflation as if it’s this monolithic entity, but it has many different forms. It appears differently in different areas of the economy. The analogy I would use is that inflation is not the tip of a spear, which is singular and pointed. It’s more like an army. An army as it advances is disorderly and chaotic.”

The gain game

O’Keefe points out that many positions within the fund are set to gain from a period of higher inflation. He adds that so-called ‘tollbooth stocks’, which generate calculable revenue thanks to their large networks, can gain from periods of higher inflation. American Express, Google and Facebook are just some of the companies in Artisan’s portfolio that he anticipates will perform well in such an environment.

Mark Dowding of BlueBay Asset Management, Co-manager of the St. James’s Place Strategic Income fund, wrote that the fact that inflation has been at all-time lows for some time doesn’t mean that investors should expect it to stay low moving forwards:

“Investors have become conditioned to expect the norms they have experienced over the past 10 years to continue to hold for a further 10. Yet, we have been flagging in recent months that the macro and policy landscape is fundamentally very different to what we have witnessed in the past couple of decades.”

He observes, for instance, that a period of higher inflation may now be more of a draw to policymakers because of the way that inflation can support governments to pay down high levels of debt by lowering their value over time. Many countries across the globe have borrowed substantial sums to fund their COVID-19 relief schemes, so letting inflation grow for a period of time might help them to deal with these debts.

Investors are always advised to think long-term, with a well-diversified set of investments at their disposal – this is the best way to tackle uncertainty. With funds invested in a wide range of assets, their performance won’t necessarily depend on just one outcome.

Brakes on Bitcoin

Another reason why last week was so noteworthy was down to somewhat of a U-turn from an executive who has previously made headlines on many an occasion. Elon Musk, CEO of electric vehicle company Tesla, announced that the company would no longer accept payment in the form of cryptocurrency Bitcoin for its vehicles.

Musk said in a Tweet posted last week (See ‘The Last Word’) that evidence that Bitcoin transactions consume huge amounts of energy meant that he could no longer approve its use as a form of payment. Perhaps irritating for anyone who had planned on buying a vehicle with their cryptocurrency gains. Yet it also brings to light a stark truth – companies simply cannot afford to overlook environmental, social and governance (ESG) factors when making future plans.

Wealth Check

According to new research from Standard Life, those who are preparing to retire have neither sufficient funds to last them through retirement, nor a plan in place to draw an income from their retirement savings.

One in four savers aged 55–64 said they were planning to stretch their retirement savings over a decade or less1 – in spite of the fact that the average life expectancy in the UK is 82 years.2 Ten per cent revealed they had budgeted for their pension to last only one to five years.3

Underestimating how long you’ll live in retirement – even by a year – can have serious implications for your retirement plans.

Fortunately, a financial adviser can help you set out your retirement goals, including establishing the lifestyle you wish to lead in retirement, the level of regular income you want, your life expectancy, and the circumstances in which you might boost or reduce your income.

Now’s as good a time as ever to have this conversation, while you’re still saving towards your pension – it can help you avoid running short of retirement funds and manage other possible risks, like inflation.

Danni Brotherston, Head of Advice Policy and Development at St. James’s Place, advises:

“Ongoing advice is important before retirement, but arguably even more so in retirement – especially if you remain invested or you’re heavily reliant on other assets to provide an income.”

Frequent health checks of your future plans will mean that your investments continue to align with your appetite for risk and make sure that your goals are reflected.

Sources:

1 Standard Life poll of 1,000 UK adults, February 2021
2 ONS National Life Expectancies for the UK, September 2020
3 Standard Life poll of 1,000 UK adults, February 2021

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select, and the value can therefore go down as well as up. You may get back less than you invested.

The Last Word

“Cryptocurrency is a good idea on many levels and we believe it has a promising future, but this cannot come at great cost to the environment.”

Tesla’s controversial CEO Elon Musk announces that the company will no longer accept Bitcoin as payment for its vehicles.

The information contained is correct as at the date of the article.

Artisan Partners and BlueBay are fund managers for St. James’s Place.

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place or Wellesley Wealth Advisory.

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