Inflation – should we be concerned?
We have been wary of a fall in bond markets for many months and the last two months have finally started to see a significant sell-off unravel. The reason? The expected return of inflation. Should investors be concerned? Yes, but probably not yet.
Expectations of rising prices have been increasing for a number of months, initially bond markets appeared relatively relaxed about this but since the start of the year they have been falling almost daily. The price of UK 10 year Gilts has fallen over 5% in the last 2 months, with yields rising sharply from 0.23% to 0.82%. In the US, 10 year Treasury yields have risen from 0.93% to 1.40%. These reflect the huge stimulus programs which Governments have announced, or are expected to announce, to reboot their economies.
We have been seeing rotation between sectors and investment styles in the equity markets and this is due to this expected return of inflation. A good example of this is the continued rise in the price of oil, up 30% since the start of the year. For those of us who have ventured back out onto the roads recently, it is noticeable how the price at the pumps is significantly higher than when we were driving more freely last summer.
The US Federal Reserve is more focused on full unemployment than inflation, and this risks inflation running “too hot” for a while. It is vital that markets continue to believe that central banks have control of the situation.
Several questions are on our minds: will this expected return of inflation become actual inflation? If so, to what extent and for how long? What is the impact of this inflation, which sectors will be hurt and, indeed, which sectors will benefit? How will consumers respond? We anticipate there is a lot of pent-up demand from consumers to spend some of their increased savings, but how will businesses respond, for example by hiking prices to make up for much lost business?
Portfolio positioning
We flagged last month that we felt it was prudent to trim risk in portfolios by reducing equities and raising cash. We felt that the prices of many equities and exuberance was overdone. We sold down some of our equity exposure to bring us from overweight to more neutral.
We are now on the lookout for opportunities to reinvest. For our Bespoke portfolios certain equities have already fallen to our target price for purchase and have been bought. For our Hardy portfolios, regular communication with the managers confirm that some of our underlying funds have been taking advantage of the price movements and adjusting their holdings, while other managers continue to hold their core themes, confident in the strong business dynamics which support their companies.
Important Information
This update is for information only and does not constitute advice or a recommendation and you should not make any investment decisions on the basis of it. The views and opinions within this document are those of Casterbridge Wealth at time of writing and may change without notice. They should not be viewed as indicating any guarantee of return from an investment managed by Casterbridge Wealth nor as advice of any nature. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested.
