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
Farouki Majeed is worried about the future. His concerns are centred around the implications of the enormous US federal debt; the global competitiveness of the US and Chinese economies; inflation; and the potential erosion of the value of the US dollar.
Should we be thinking about investment differently in 2021? Certainly, there appears to be cause for challenge of current thinking on inflation rates and the rise of China in the new world order.
2020 was by just about any measure, unprecedented. Market volatility, regulatory change and the need to make decisions quickly – but largely remotely – put more emphasis than ever on dynamic and effective decision-making in pension investment committees. It was a true test of robust governance.
The COVID crisis and the volatility of 2020 has revealed some lessons for the investment team at Coal Pension Trustees (CPT). It has taken a more top down view of managing its portfolio looking at economic themes, risk exposures, cashflows and its manager roster holistically. Amanda White talks to CIO Mark Walker about where it sees return opportunities, the prospect of manager consolidation and how it has embraced technology for better investment practices.
The challenge of matching long-term investing with development needs in emerging and developing countries is discussed by Georg Inderst who suggests it might be time for asset owners to look at their role in blended finance.
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