Capital Group economist Robert Lind is a bit short on calling the current inflation surge temporary and sees faster-than-expected central bank intervention as the biggest risk to the bull market. He also has strong views on Sino-US trade relations and holding bonds in a portfolio.
Inflation uncertainty
Robert Lind stresses that market observers should be humble when making predictions about inflation. “There has been unprecedented support for families and businesses, allowing them to rebuild their savings despite the huge economic shock,” he said. “That’s a big difference from a normal recession. And today, consumers have a lot of firepower, which will support demand significantly over the next nine to 12 months.”
According to Lind, however, there is not only a demand shock but also a supply shock.
“In the short term, shortages will worsen as many companies look to rebuild their inventories. And this will have an effect on the whole supply chain. In addition, it can get even worse if companies want to bring production closer to home (reshoring). And in the past we have always seen that a supply-side problem has caused rising inflation.”
Lind says it is very tempting to say inflation will be transitory and that is actually the consensus in the market today. But he does see inflation in the medium term turning out to be higher than generally expected. “I think many governments are not reluctant to go higher on inflation so that the economy can absorb the recent shock more easily.”
The biggest risk for markets today, according to Lind, is that central banks will have to react to this higher-than-expected inflation and tighten monetary policy faster than envisaged.
“And no one in central banker circles is actually comfortable that inflation is transitory, they just don’t show it.” For Capital Group, equities are a natural hedge against inflation. “But there will be winners and losers because not every company will be able to pass on higher costs to customers equally well, for example. Either way, we expect volatility in equity markets to increase.”
China/US war: bad for Europe
Lind also wanted to talk about China because the growth trend in the country is more likely to show a top pattern. “After all, the government thinks it has had enough support measures for now. Let off some steam and curb the excesses a bit is now more the order of the day. For now, we have had the best of it and in the second half, the growth rate will decline somewhat. And we believe that not letting the Chinese economy overheat is good for risky assets.”
He also thinks it is wrong to see the US trade policy of the past few years as Donald Trump’s policy. According to him, it goes much deeper than that one person in the White House. “The current policy demonstrates a fundamental change in the way US policymakers view China economically and geopolitically. The Biden administration will therefore continue to be quite sceptical of China and its trade relations.”
“The same policy as under Trump will continue and will continue to cause tensions for years to come. Especially now that pressure has increased on US companies to withdraw some of their production from the country.” He therefore expects trade tensions to continue and ironically have a heavier impact than expected on the European economy. “Europe, and certainly Germany, has benefited greatly from globalisation and booming trade with China in recent decades. And now President Biden is asking Europe to choose.”
Bonds a must
Capital Group also noted that today it is widely held that fixed-income investments as an asset class are fully valued and are not considered attractive. There is also a fear of negative returns.
“However, if you look at the returns of bonds in periods when interest rates are rising, they did not do badly over a longer period. Fixed income will always play a role in a broader portfolio, especially as a diversifier against risky assets, to ensure capital preservation, to generate income and to hedge against inflation, among other things through inflation-linked bonds. These four arguments remain valid today!