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The US Federal Reserve’s (Fed’s) message on inflation is clear: Higher domestic inflation is likely in the period ahead, but it should be “temporary” in nature. This begs several questions, among them: What exactly does “temporary” mean? Which price increases, if any, could be longer lasting? And if higher inflation proves to be “stickier” than anticipated, how should investors position their portfolios?

The Fed’s latest forecast is for the Consumer Price Index (CPI) to rise to 2.6% this year (which it already hit in March), before settling back down to just over 2% in 2022 and 2023. Likewise, market expectations (as observed in recent “breakeven” inflation rates) are for US inflation to pick up in the near term and then come down longer term. Yet I am hearing from some of my analyst colleagues that many areas of the economy are facing stubborn supply shortages and upward price pressures, including freight, semiconductors, housing, raw materials, and labor.

Thus, in my view, the risk is that higher inflation may have a longer-than-expected “tail” before…

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Nanette Abuhoff Jacobson
Nanette Abuhoff Jacobson
Global Investment and Multi-Asset Strategist
Boston

As discussed in my latest white paper, An allocator’s agenda for a reflating world, I’m concerned that many asset allocators seem to remain stubbornly positioned for a world of falling bond yields, declining inflation, and low economic growth. In my view, this is largely due to what I call a persistent “status-quo bias,” rather than much in the way of active positioning for the realities of today’s evolving global landscape.

As a result, I believe many clients have portfolio positioning that is ill-equipped to successfully navigate the potentially reflationary period ahead. The remedy? While I certainly don’t recommend a wholesale shift to all “reflationary” assets, I think one important item on every allocator’s “to-do” list should be…

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MARKETS
Nick Samouilhan
Nick Samouilhan
PhD, CFA, FRM
Multi-Asset Strategist
Singapore

The Wellington Global Cycle Index1 points to an upturn in global economic activity but, in my view, even that positive prognosis is underestimating the bounce that’s ahead. Over the next six months, I predict that growth numbers almost everywhere will be exceptionally strong.

Where we differ from consensus

Almost all analysts now have the same broad roadmap for 2021 as we have — strong growth, with a gradual rise in inflation through the second half of 2021. All list the same set of risks: upside risks are attached to a full household-savings unwind and another round of fiscal support, while downside risks are attached to public health. All assume US growth leadership. What is striking is how there is actually very little discussion of inflation.

As economies reopen, it will be difficult for the market to distinguish between…

Inflation has become a top-of-mind topic for clients in recent months, with many exploring ways to position for potentially higher inflation in the period ahead. However, after a decade of “disinflation,” we believe the investment community continues to anchor to the prior regime and to some stubborn misconceptions around inflation hedging. Here are five that could prove costly if, in fact, inflation does rise.

Misconception #1: You can wait to allocate to inflation hedges until we have higher inflation.

Reality: Timing when to buy inflation-related assets is just as difficult as trying to “market time” any other type of investment. That’s why investors are advised to hold strategically diversifying assets like stocks and bonds and, in our view, should also own inflation-sensitive assets as a long-term, strategic portfolio allocation. As with any asset, the fundamentals are…

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Nick Petrucelli
Nick Petrucelli
CFA
Portfolio Manager
Boston
David Chang
CFA
Commodities Portfolio Manager
Boston

Investors can breathe a collective sigh of relief — for now anyway. The Federal Open Market Committee’s (FOMC’s) March statement and press conference suggested that the FOMC is likely to look through any inflation pickups this year and wait until the labor market has recovered to assess whether inflation can sustainably stay around 2%.

The FOMC projects significant improvement in the unemployment rate and a modest overshoot of its 2% average inflation target in 2021. But even against expectations for higher growth and inflation this year, the median FOMC member’s forecast still anticipated the…

MACRO
Jeremy Forster
Jeremy Forster
Fixed Income Portfolio Manager
Boston

Interest rates have been rising since August 2020, with the yield on the 10-year US Treasury bond having drifted 100 basis points (bps) higher over the past six months or so. But recent rate action has really caught the market’s attention, particularly the 10-year yield’s swift 30 bps increase and the spillover into global equity markets.

Is the latest bout of “rate repricing” due to higher inflation expectations? Stronger economic growth? Treasury supply issues? “Fed fighting”? Let’s try to make sense of it all.

Yields have risen for the right reasons — Rates have been adjusting to prospects for better growth and higher inflation for months now, reflecting an improving pandemic outlook and ample policy support. Rising inflation expectations are baked into wider spreads between Treasury yields and real (inflation-adjusted) yields, using 10-year Treasury Inflation-Protected Securities (TIPs) as a proxy. Orderly rate moves have been absorbed by…

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Nanette Abuhoff Jacobson
Nanette Abuhoff Jacobson
Global Investment and Multi-Asset Strategist
Boston

My previous inflation-related blog posts have focused on the debate around the threat of rising inflation going forward and on the potentially disruptive portfolio effects of higher inflation, particularly how it can upend the traditional equity-bond relationship in client portfolios. This time, I’d like to: 1) explain why the specific source of the inflation matters; and 2) provide a “playbook” of sorts to help asset allocators monitor and mitigate inflation risk based on its source.

Consider the source of inflation

Many investors use standard inflation indices, such as the Consumer Price Index (CPI) or the Producer Price Index (PPI), to track changes in inflation over time. While useful to a degree, these broad indices are only intended to serve as…

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Nick Samouilhan
Nick Samouilhan
PhD, CFA, FRM
Multi-Asset Strategist
Singapore

This is the third in my inflation “series” of blog posts based on ongoing client conversations. In the first one, I explained why rising inflation is not an imminent threat, but could be down the road. The next one compared today’s inflation worries with those that arose following the 2008 global financial crisis. Now I’d like to shift to a topic of even greater interest to many clients: the implications of higher inflation for investor portfolios.

Inflation can affect a portfolio in multiple ways over time. One way is through its potentially profound impact on the basic equity-bond relationship, which is typically critical to the performance and resilience of a diversified portfolio.

Dissecting the relationship

Bonds have often rallied (or at least mitigated downside) during equity market selloffs, thereby providing portfolio diversification benefits. What some investors overlook is…

MACRO
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Nick Samouilhan
Nick Samouilhan
PhD, CFA, FRM
Multi-Asset Strategist
Singapore

“It’s like déjà vu all over again.” – Yogi Berra

In my last inflation blog post, dated 10 November 2020, I addressed a question that many clients have been asking lately: Are we about to enter a global “inflation era”? My short answer was (and still is) not right now, but potentially down the road. By way of follow-up, I thought I’d compare today’s inflation worries with those that arose during the quantitative-easing (QE)-fueled period after the 2008 global financial crisis (GFC).

The current inflation concerns, set amid a world of growing central bank balance sheets, ballooning fiscal deficits, and unprecedented policy innovation, echo the inflation fears raised in the post-GFC era. In the end, those latter fears proved to be unfounded, as inflation continued to decline over the ensuing decade. Why would this time be any different? To answer that, it helps to understand what the QE measures enacted in response to the GFC were actually intended to do — and why they…

MACRO
THEMES
Nick Samouilhan
Nick Samouilhan
PhD, CFA, FRM
Multi-Asset Strategist
Singapore
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Every quarter, we survey around 100 of our Wellington colleagues in different investment disciplines and locations to get their views on what we see as the key macro questions of the day.

We believe that the framing of the questions is crucial. For example, many surveys ask respondents to list what they see as the current key risks. In our survey, we ask for the top three risks our participants believe the market is most complacent about. That requires them first to think about the risks — which are often fairly evident — and then to grade them on how far they are priced into markets. For us as investors, that is clearly the more important information, as it can help us to identify areas where the markets are mispricing risk and thus creating…

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Jens Larsen headshot
Jens Larsen
PhD
Macro Strategist
London
Benjamin Cooper
Ben Cooper
CFA
Multi-Asset Strategist
London

In my conversations with clients at the end of 2020, many of the same questions kept coming up. Here are five that topped the list, along with my thoughts in response.

#1: Given last year’s robust market gains and the current state of the economy, how optimistic are you about 2021?

There are always risks for investors to navigate. Notably, this latest surge in COVID-19 cases, hospitalizations, and deaths marks a tragic phase in the ongoing global health crisis. However, as we learned in 2020, markets are forward looking. I believe the recently approved COVID vaccines, gradually reopening economies, and easy fiscal and monetary policy should provide a supportive backdrop for potentially solid gains from risk assets in 2021. So optimism seems in order, but given that is the consensus view, I am only moderately bullish on global equities as of this writing.

FIGURE 1

There is pent-up demand to “get back to normal”

#2: What’s your take on what a Biden presidency might look like?

Many investors are concerned about a progressive Biden agenda. However, the president-elect’s razor-thin majorities in the House and Senate and a low likelihood of removing the Senate filibuster have dimmed chances for proposals like the “Green New Deal” and “Medicare for All.” That said…

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MARKETS

ARCHIVED

Nanette Abuhoff Jacobson
Nanette Abuhoff Jacobson
Global Investment and Multi-Asset Strategist
Boston

In my conversations with clients at the end of 2020, many of the same questions kept coming up. Here are five that topped the list, along with my thoughts in response.

#1: Given last year’s robust market gains and the current state of the economy, how optimistic are you about 2021?

There are always risks for investors to navigate. Notably, this latest surge in COVID-19 cases, hospitalizations, and deaths marks a tragic phase in the ongoing global health crisis. However, as we learned in 2020, markets are forward looking. I believe the recently approved COVID vaccines, gradually reopening economies, and easy fiscal and monetary policy should provide a supportive backdrop for potentially solid gains from risk assets in 2021. So optimism seems in order, but given that is the consensus view, I am only moderately bullish on global equities as of this writing.

Figure 1

US Dallas Fed Mobility Engagement Index ("Social Distancing" Index)

#2: What’s your take on what a Biden presidency might look like?

Many investors are concerned about a progressive Biden agenda. However, the president-elect’s razor-thin majorities in the House and Senate and a low likelihood of removing the Senate filibuster have dimmed chances for proposals like the “Green New Deal” and “Medicare for All.” That said…

MACRO
MARKETS

ARCHIVED

Nanette Abuhoff Jacobson
Nanette Abuhoff Jacobson
Global Investment and Multi-Asset Strategist
Boston

In my conversations with clients at the end of 2020, many of the same questions kept coming up. Here are five that topped the list, along with my thoughts in response.

#1: Given last year’s robust market gains and the current state of the economy, how optimistic are you about 2021?

There are always risks for investors to navigate. Notably, this latest surge in COVID-19 cases, hospitalizations, and deaths marks a tragic phase in the ongoing global health crisis. However, as we learned in 2020, markets are forward looking. I believe the recently approved COVID vaccines, gradually reopening economies, and easy fiscal and monetary policy should provide a supportive backdrop for potentially solid gains from risk assets in 2021. So optimism seems in order, but given that is the consensus view, I am only moderately bullish on global equities as of this writing.

Figure 1

There is pent-up demand to “get back to normal”

#2: What’s your take on what a Biden presidency might look like?

Many investors are concerned about a progressive Biden agenda. However, the president-elect’s razor-thin majorities in the House and Senate and a low likelihood of removing the Senate filibuster have dimmed chances for proposals like the “Green New Deal” and “Medicare for All.” That said…

MACRO
MARKETS

ARCHIVED

Nanette Abuhoff Jacobson
Nanette Abuhoff Jacobson
Global Investment and Multi-Asset Strategist
Boston

The short answer is not right now, but potentially down the road. And I believe it’s less about how high inflation can go than it is about the portfolio implications of even moderately higher global inflation, which investors haven’t experienced for most of the past 30 years.

It may seem odd to talk about inflation these days. However, the substantial level of coordination between monetary and fiscal policymaking following the COVID-19 shock, with many central banks providing ample space for fiscal stimuli by buying up newly issued debt, has led to inflation coming up in many discussions with clients lately. A string of recent data releases has also helped put inflation risk back on some clients’ radars.

Nonetheless, I think it’s fair to say that many clients remain to be convinced that inflation poses a real threat to their investment portfolios, particularly because…

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Nick Samouilhan
Nick Samouilhan
PhD, CFA, FRM
Multi-Asset Strategist
Singapore

The Federal Open Market Committee’s (FOMC)’s September statement and press conference did not deliver any big surprises. The upshot is that the US Federal Reserve (Fed) appears to be committed to maintaining its “dovish” monetary policy stance for the foreseeable future.

Look no further than the Summary of Economic Projections (SEP), released in conjunction with the FOMC meeting minutes, in which the majority of participants indicated that Fed policy rates should remain around zero through 2023. This was largely expected, given the recent shift in the Fed’s inflation framework: Whereas the Fed has historically targeted an average inflation rate of 2% over time, under the new framework, the Fed could allow inflation to…

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Jeremy Forster
Jeremy Forster
Fixed Income Portfolio Manager
Boston

It’s been awhile since the CPI gave us something to think about, but today I believe there is an increased (and growing) probability of an inflationary outcome driven by several factors:

  • The public health crisis is an exogenous shock (vs. the endogenous adjustment of a typical recession), suggesting a quicker recovery (influenced by the path/duration of the virus).
  • The policy response to the crisis was swift and massive. This is the first time in decades there has been coordinated monetary and fiscal easing, and it is at a scale never seen outside of wartime.
  • If Biden wins the US election, his administration will likely focus immediately on additional stimulus for the unemployed. Combined with the Fed’s “whatever it takes” approach to fighting deflation, this provides additional upside support to inflation.

Compounding the challenges faced by some institutions

The inflation/deflation outcome will have important portfolio implications for many institutional investors, including…

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Cara Lafond
Cara Lafond
CFA
Multi-Asset Strategist
Boston

By its very nature, the financials sector is a highly macro-exposed area of the equity market. As we have already witnessed over the past several months, what happens on the global macroeconomic front as a result of the COVID-19 crisis will directly impact financial stocks.

The rub, of course, is that no one really knows what will happen from here. Indeed, there is considerable uncertainty around the global macro outlook, with a wide range of potential economic outcomes in play. Financials generally don’t like macro uncertainty, and that’s reflected in the discounted valuations of many such stocks (particularly more balance-sheet-oriented companies like banks and life insurers). In effect, broadly speaking, I believe the sector offers a…

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Andrew Heiskell
Andrew Heiskell
Global Industry Analyst
Boston

Most of our inflation gauges suggest the figure is likely to fall towards zero in the next 6 – 12 months. But I think the ingredients are coming together to make higher global inflation (>3%) in the next 3 – 10 years more likely. I also expect the UK to be a bellwether for the higher longer-term inflation to come, given its recent history and the UK’s unique characteristics.

Six reasons why inflation should be higher in the next 3 – 10 years

I think there will be a series of negative supply shocks as there is likely to be:

  1. Less imported deflation due to stalling global trade and a larger services proportion of CPI baskets.
  2. A greater emphasis on local rather than global resources because supply chains will increasingly become localised and the government’s objective will be to protect national labour markets.
  3. Continued low productivity as governments will likely become more active at directing resources within economies and protecting…
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John Butler
John Butler
Macro Strategist
London
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