Two industry experts have warned the recovery from the COVID-19 pandemic is likely to see a lift in inflation, which will negatively impact investors’ returns.
Nucleus Wealth head of investments Damien Klassen said consumer staples and growth stocks are likely to suffer if inflation rises, while value stocks, including travel, banks, cyclical industrials and energy, could outperform.
“While rising inflation expectations were a minor feature in January, February markets reflected higher inflation expectations, and we expect this to continue through the next 12-18 months,” says Mr Klassen in a note to investors.
Magellan’s CIO, Hamish Douglass, also warned investors that the strong world economic recovery could produce a further rise in bond yields and accelerate inflation in the back end of 2021.
“If it is the new inflation coming, the Federal Reserve at some point is going to have to change course and start lifting interest rates. That is a disaster for financial markets… If you raise interest rates abruptly to head off a real inflation threat, hold on to your chairs,” Mr Douglass said.
He added that while the situation was unlikely, a monetary policy-induced inflation was not out of the question.
“The very long-term – is all this printing of money going to lead to a new paradigm and monetary induced inflation in the world? That is a great question that I do not know the answer to… It is very foggy out there,” he said.
While warning of possible inflation rises, Mr Klassen has also pointed to a rise in bad credit with ‘extend and pretend’ replacing the threat of bankruptcy.
“Someone who can’t pay their rent is not evicted but allowed to accrue debt. Don’t foreclose on those who can’t pay their interest. Instead, build up their interest payments into a larger debt burden.
“The end game of this practice will be a cohort of zombie consumers and businesses. Weighed down by debt burdens too massive to ever pay off but supported by interest rates low enough to keep them from defaulting.”
Mr Klassen argues policymakers have decided on ‘zombification’, that is, limit bankruptcies, increase debt and never raise interest rates again. He says it doesn’t make for a healthy economy, but it limits short-term pain that appears to be the current goal of most politicians.
“This zombification is inflationary in the recovery phase but deflationary soon afterwards as oversupply swamps demand.
“We are, therefore, suspicious that beyond 2021-22 we are entering a new inflationary cycle, as some have posited,” he concluded.
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