Inflation is heating up – Reactions from wealth managers

High inflation challenges wealth managers and their wealthy clients to protect what they have at acceptable levels of risk.

If anyone doubted that US inflation was high and a concern for wealth management asset allocators and their clients, the numbers released earlier this week put them to rest. Consumer price inflation in March came in at 8.5% year-on-year, slightly ahead of market consensus forecasts. The US Federal Reserve is expected to continue raising rates. Ironically, China is maintaining its loose monetary policy as Beijing grapples with the pandemic and the impact of its zero-Covid policy, as well as worries about its debt-laden real estate sector.

How much of the spike in inflation is due to the impact of massive quantitative easing since 2008 and policies designed to curb fossil fuel production, as well as the disruptions caused by the pandemic, is one of the biggest political debates today. However, critics of the Biden administration find it hard to attribute much of the blame to him, as the big expansion of the Federal Reserve’s balance sheet via QE began a decade ago and hasn’t really slowed down during the Trump presidency. What is also clear is that the deflationary impact of importing cheap goods from China – ironically to the fury of those who claim these destroyed Western jobs – has faded as tariffs and structural effects came into effect.

All of this gives wealth managers a hard time. Much of the focus in recent years has been on private markets such as private equity, as these are expected to generate better risk-adjusted returns than listed equities in a very low rate environment. Government bond yields were hammered. Property prices have been supported by QE. So what do managers do? It is also likely to weigh on people’s minds for the rest of this year and into 2023.

Anyway, here are some views that happened overnight. We’ll update with more as they arrive. E-mail [email protected]

David Chao, Global Market Strategist, Asia-Pacific (ex-Japan), Invesco
We have already seen a substantial divergence in monetary policies between China and the United States since the start of the pandemic, but we can expect this to intensify over the rest of the year as policymakers in Beijing flood the economy with stimulus, while the Fed tightens monetary policy. to fight high inflation.

Although the Fed’s inaction over the past year has led to record levels of inflation, I’m also a bit concerned about recent increasingly hawkish statements from Fed officials who may be too pessimistic about the controlling inflation. I think the Fed should be able to thread the needle as long as it slowly normalizes monetary policy and depends on the data. It is also possible that inflation will cool faster than expected this year, which could then leave more room for Fed tightening. If the Fed manages to rein in inflation without tightening financial conditions too much, US equities could rally and the pivot to value and cyclical sectors could continue.

Harmen Overdijk, Chief Investment Officer, Leo Wealth
Global stocks are currently trading at 18 times forward earnings. Relative to actual bond yields, equities continue to look reasonably cheap. Valuations are particularly attractive outside the United States where shares are trading at 13.7x forward earnings. Emerging markets are trading at a forward PER of just 12.1. We believe international equity markets can outperform the US market over the next 12 months. In general, international markets perform better in an environment of accelerating growth and a weaker dollar, precisely the environment we expect to prevail in the second half of the year. We continue to favor quality and value stocks.

Silvia Dall’Angelo, Senior Economist, Federated Hermes
CPI inflation in the United States may have peaked this month, assuming there is no escalation of the conflict in Ukraine and oil prices move in line with the future curve in the future. ‘coming. However, there are still considerable external and internal price pressures in the pipeline – it will take some time for input and labor costs to feed through to consumer prices – which means that inflation will likely remain sticky at elevated levels for the rest of the year unless. We now expect it to average 7% this year. Over the longer term, stabilizing energy prices, base effects, easing global supply constraints and, most importantly, slowing domestic demand should all contribute to a rapid reduction in inflation. That said, inflation could eventually stabilize above the Fed’s 2% target, as the pandemic and war in Ukraine have catalyzed structural changes in the domestic labor market and across chains. global supply chain, while a poorly managed green transition would also prove inflationary. .

[Tuesday’s] Today’s inflation report confirms expectations that the Fed will hike 50 basis points in May, as already suggested by the recent FOMC communication. By the Fed’s own admission, the central bank is behind in its fight against inflation and is eager to catch up to bigger rate hikes and the start of quantitative tightening in upcoming meetings – an uncertain business being given that monetary policy affects the real economy with lags of between 12 and 18 months, and it is not entirely clear how quantitative easing works. While the Fed still believes it will be able to stage a soft landing, that rarely happens, and the convergence of cost inflation that squeezes real incomes, monetary and fiscal tightening could deliver a bigger hit. hard as desired for the application down the line.

Charles Hepworth, Chief Investment Officer, GAM Investments
US inflation continues its inexorable rise with an increase in March to 8.5% year-on-year, slightly ahead of market expectations of 8.4%. It reminds me of a time 40 years ago when I was a young pup trying to scrape together enough spending money to buy this new thing called a Walkman. The small bright spot, if there is one in this latest inflation print, is that basic prices (which exclude most of the basic things consumers need most, like food and energy) grew slightly slower than expected, at 6.5% year-on-year. against 6.6% expected.

Russia’s incursion into Ukraine and the subsequent impact on gas prices had a disproportionate impact – accounting for more than half of the monthly gain in inflation data. Inflation at these levels could be close to peaking as there are minor signs of demand destruction. It’s a very long road of Federal Reserve rate hikes that we will have to travel before this once “transitional” genius is back in the bottle.

Dan Boardman-Weston, CEO and CIO, BRI Wealth Management
The numbers will add further pressure on the Fed to accelerate the pace of interest rate increases and potentially increase by 0.50% at the next meeting, as opposed to the traditional 0.25%. However, significant increases in the cost of living and interest rate hikes will begin to have a negative impact on the growth outlook for the US economy, which could cause the Fed to deviate from course throughout the second half of 2022 or 2023. The Fed has a tricky job at hand, and historically it has struggled to fight inflation without slowing economic growth.

Ronald Temple, Managing Director, Co-Head of Multi-Asset and Head of US Equities, Lazard Asset Management
While it is encouraging to see the core CPI month over month decelerating to just 30 basis points, our focus is on the rising cost of housing. Non-hotel housing costs rose 4.5% year-on-year, the biggest increase since 2007, and we are seeing an acceleration in rent increases in many cities. Higher rent often translates directly into higher wage demands, increasing the risk of a wage-price spiral.

Dolores W. Simon