Will the COVID-19 crisis mean we will be trapped in the lower for longer regime or are we on the road to a rate change? This session examined the proposition that we are in a “lower for longer” environment, explored whether a reflationary environment will prevail, and debated if growth is around the corner. The session also highlighted what these potential scenarios might mean for investors and identify opportunities from an investment perspective. 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Key takeaways
Inflation has become the number one investor worry according to a poll of delegates at FIS Digital 2021 with 51 per cent of respondents naming rising prices above any other risk.
But it might not be long-term. Country by country and demographic drivers are disinflationary, and today’s robust economic activity will tail off and economies will turn as sluggish as 2019.
Other panellists argued inflation could remain uncomfortably high. Even transient factors can take a while to unwind – particularly a labour shortage.
The longer inflation stays high, and the less pre-emptive central banks are in trying to curb it, the greater the risk.
Investors face challenges keeping to strategic asset allocations and navigating the impact of lost diversification between stocks and bonds.
One popular strategy comes via increased allocations to commodities where low inventories has left many commodity markets in backwardation. But looking ahead factors like China prioritising financial stability over growth could quickly change the picture. Moreover, if central banks turn hawkish, it bodes badly for industrial metals.
Elsewhere commentators said taxes will rise and this means deflationary forces could hold back the demand side. Systemic forces will also drive down inflation – taming inflation won’t just be the responsibility of central banks.
Many pension funds’ portfolios are not designed for unanchored inflation. Insurance assets like inflation-linked bonds or commodities are good in the short-term but don’t fit easily in a long-term portfolio.
Central bank credibility has provided an extraordinary backdrop to investment decisions – and any sense that discipline might be eroding could end badly for the portfolio.
What do you consider to be the biggest risk facing your portfolio right now?[vc_line_chart x_values=”” values=”%5B%7B%22title%22%3A%22Geopolitical%20risk%22%2C%22y_values%22%3A%2212%22%2C%22color%22%3A%22blue%22%7D%2C%7B%22title%22%3A%22Volatility%20of%20markets%22%2C%22y_values%22%3A%2222%22%2C%22color%22%3A%22pink%22%7D%2C%7B%22title%22%3A%22Inflation%20%22%2C%22y_values%22%3A%2251%22%2C%22color%22%3A%22mulled-wine%22%2C%22custom_color%22%3A%22%238d6dc4%22%7D%2C%7B%22title%22%3A%22Liquidity%22%2C%22y_values%22%3A%227%22%2C%22color%22%3A%22juicy-pink%22%2C%22custom_color%22%3A%22%236dab3c%22%7D%2C%7B%22title%22%3A%22Climate%20risk%22%2C%22y_values%22%3A%228%22%2C%22color%22%3A%22peacoc%22%2C%22custom_color%22%3A%22%2300c1cf%22%7D%5D”]
The big difference between the vaccine rollouts and the scale of the stimulus measures across the world could result in a K-shaped global economic recovery, with much of the developed world booming but poorer countries continuing to struggle. However the
Investors discuss how technological change and the new green economy is re-pricing assets in infrastructure, as well as the trend to substitute fixed income with infrastructure debt. But investors should not to lose sight of traditional infrastructure characteristics in their quest to tap new trends. Predictable cashflows and downside protection remain central.
Research that looks at the relationship between economic transparency and defining investment qualities such as yield spreads, credit ratings and stock price volatility shows sovereign transparency helps improve the value of assets, enables countries to lower their borrowing costs and achieve a better credit rating.
Inflation holds investor opportunities as well as perils. Emerging markets, commodities and linkers do well in a climate of rising prices while central banks are likely to act quickly and aggressively in response rather than early or gradually.
The unprecedented level of government debt signals sub-par economic growth ahead, warned Farouki Majeed, chief investment officer, Ohio School Employees Retirement System speaking at FIS Digital alongside Rich Randall, head of global debt at IFM Investors.
Inflation is the number one investor concern and whether it is here to stay was the subject of much debate at the Fiduciary Investors Symposium. While its longevity is contested it was agreed that its presence has important implications for the correlation between bonds and equities which creates problems for portfolio design. Investors at PGIM, QMAW, CPP Investments and NEST discuss.
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