15 February 2022
Financial markets in the West wavered last week, after US economic figures revealed that inflation hit 7.5% in January.
At the highest level of inflation in the US since 1982, there are concerns that households are about to experience significant pressure on the cost of living.
Increasing inflation can also cause costs to rise for companies; however, Martin Hennecke, Head of Asia Investment Advisory & Comms at St. James’s Place, reflected that the effects of inflation aren’t always even:
“Companies with an edge in the market typically can at least pass on rising input costs to consumers in the form of higher prices charged for goods and services delivered, and hence provide a degree of inflation protection for investors in the long run.
“In December, a report by the Federal Reserve Banks of Richmond and Atlanta confirmed this in a Chief Financial Officer survey, which found that “the overwhelming majority (about 80%) of firms experiencing these unusual cost pressures, are passing on at least some of these cost increases to customers through higher prices.”
With inflation continuing to increase, there are growing expectations that the US Fed will take a more aggressive stance when it comes to upping interest rates. No easy task for any central bank, with economies remaining fragile as they gradually end their COVID-19 restrictions. Gordon Shannon, Partner, Portfolio Management at TwentyFour Asset Management, commented:
“Today, central bankers’ task is all the more difficult because inflation isn’t their only concern; controlling it must be balanced against preserving a global economic recovery that is beginning to look more fragile. It is a fine line policymakers must tread, and for investors, it raises the risk that central banks could end up being either too dovish or too hawkish.”
On home soil
The UK will reveal its January inflation figures in the upcoming week. Although these have historically been a bit lower than the US numbers, they have followed a similar pattern, and will likely point to continued pressure on inflation throughout the UK economy.
The Bank of England has already raised interest rates once this year, and many are predicting that there are more rates increases to come, given the high levels of inflation. Even if the Bank were to raise interest rates, they remain well below the current rate of inflation.
The impact will be felt across households, says AXA’s David Page:
“Over the coming months, the challenges to real incomes are likely to dominate, National Insurance increases and the utility price hike in April and general price increases are set to weigh on the consumer and provides a challenging outlook for growth. We expect that the drawdown of savings accumulated over the pandemic will bolster consumption – though this is unevenly distributed across households.”
Rising inflation and interest rates have contributed to an unpredictable market, with some sectors performing well so far in 2022, and others struggling.. Alex Correia, Senior Equity Analyst at St. James’s Place, says investors should not panic when volatility hits and expect short-term corrections now and then. He adds that they have historically done little to dampen long term returns on equities.
He adds that we are now seeing a rotation, where a different set of markets and sectors are starting to perform compared to those in recent times. For example, he notes:
“We saw a very pronounced trend where US growth [stocks] had been outperforming the rest of the market over the last five years, but over the last quarter we’ve seen that start change.”
Instead, so far in 2022, the FTSE has begun to witness stronger performance. Correia says this is the time where active managers can prove their worth. He says:
“When you have a market that is only moving in one direction, it’s very difficult for an active manager to distinguish themselves and add value. A volatile market with different asset classes or companies heading in different directions is a fertile feeding grounds for an active manager.”
TwentyFour Asset Management and AXA Investment Managers are fund managers for St. James’s Place.