Global markets have largely been driven by inflation sentiment since early 2021 and it seems to be a game of stick or twist for bond and fund managers. Last week the US headline rate of CPI was 5% (beating estimates of 4.7%) and UK inflation is now above the Bank of England’s 2% target. The main question for investors and fund managers is whether inflation is here to stay or if it is just transitory in line with a re-opening world economy coming out of a recession.
From early November 2020 through to early February 2021 the markets were buoyant propelled by positive vaccine data. Inflation fears then caused a spike in longer term treasury yields which caused a correction for many speculative growth stocks which were seen trading a extreme valuations. As we reach the half way point of 2021 it seems that inflation could be the key factor in determining stock and bond market returns for the remainder of the year.
The Federal Reserve have done a good job in dampening down fears of inflation being a longer term problem and it seems for the time being that investors have bought into this. Market volatility for the last few weeks is about as low as it has been since the start of the pandemic and there are plenty of disinflationary headwinds to abate any such fears. Ageing demographics, debt and technological innovations could all play their part in keeping inflation under control. Either way the next 6 months should provide us with some interesting data both in the UK and US and this will play a key role in where indices end up on December 31st. In terms of protecting against the effects of inflation it is important to maintain a diversified portfolio including commodities and to consider the level of corporate debt your are exposed to along with its quality.