Investors are likely to remain risk-averse in the short-term until inflation starts to decline, according to State Street.
Inflation in Australia and globally had been increasing in the last few months and was 6.1% in the June quarter in Australia, 8.2% in the United States and 8.6% in the United Kingdom.
This had fed into markets – the S&P 500 was down 23% since the start of the year while the ASX 200 was down 14% – and made investors nervous of equities. There was also the expectation of more volatility to come and investors had de-rated companies, especially those with longer-dated growth or uncertain cashflow.
This was in contrast to 2019 and 2020, State Street said, when growth companies had been highly in investors’ favour.
In an investor update, State Street said: “Inflation is causing extra volatility and risk for equity markets at the moment for good reason. The inflation headwind is likely to remain until higher rates have done their job of reducing aggregate demand and taming inflation. In this inflationary environment investors are likely to stay more risk averse in both security selection and equity valuations.
“The jury is still out as to whether inflation has peaked or not, but as long as rates remain above central bank target levels, interest rate policy settings are unlikely to remain expansionary. Markets often trade off the change in economic variables but the absolute levels are also important. Stubbornly high inflation is likely to keep central banks hawkish and equity markets volatile until inflation is tamed.”
