How investors can live with inflation
The BlackRock Investment Institute expects 2022 to be the second consecutive year in which global equities grow while global fixed income yields decline, something which has not happened for at least 50 years.
BlackRock Investment Institute chief Asia strategist, Ben Powell, said this “big picture context” of low yields for fixed income and persistent global equities performance (although less strong than the last couple of years) could be viewed through three themes.
Powell’s first theme was the idea that investors must “live with inflation” with the institute expecting inflation in the US to likely fall dramatically through the remainder of the year then stabilise at a level higher than investors were used to.
But he said it was important for central bankers to consider where inflation was coming from.
“We think the current high inflation that we’re seeing in different parts of the world is mostly different by supply side factors… and that diagnosis is important in that it has implications for, frankly, the relevance of monetary policy,” he said.
“It’s not clear to us that central banks, through monetary policy, impact things like port congestion off of California or the supply of semi-conductors and so forth.
“So it’s not obvious to us that raising rates very dramatically would help solve the current problem of inflation but clearly it would create a negative impact onto growth and potentially unemployment.”
Powell’s second theme for investors was to “cut though confusion” surrounding events such as the Russian invasion of Ukraine and COVID-19.
“Given this confusion, that the market is going to have to discount in real time, we are expecting a less extreme upside scenario for equities through 2022 and a more normal high single digits return rather than the more dramatic upside we’ve seen in the last couple of years.”
And the third and final theme, according to Powell, was for investors to “navigate net zero”.
“So what we think now is important for investors is to move away from ‘is the transition going to happen?’. Increasingly, it looks like we've got quite a clear answer to that; the answer being yes,” Powell said.
He said the conversation about net zero needed to be at a more granular level where investors would need to ask how firms would navigate specific risks and opportunities of net-zero at the asset class level.
AUTHOR
Liam Cormican
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