There were further developments this week to inflation narrative with higher-than-expected US CPI. As seen earlier in the year, the market responded predictably with rising yields, with longer duration growth stocks suffering accordingly. More unexpectedly, our positions in more value orientated sectors such as Financials also drew down, with seemingly little place to hide in equity markets. Although always painful to watch, portfolios are essentially back to where they were at the beginning of April which is no great problem in relation to longer term investment plans.
Furthermore, TS Lombard have also recently amended their base scenario for US inflation but still do not see it as a problem for this year. In a note from Chief US Economist Steven Blitz, the key points are as follows:
· Markets are mispricing inflation fears: No inflation until late this year, however Inflation of 2.5-3% likely for the US by 2023
· Inflation from China reverses this year, but will it be the same source of disinflation in the coming decade?
· We still expect a Taper end of this year.
· The price increases of today will pass, the Fed’s inflation problem begins sometime next year
We remain relatively unconcerned with these developments and think our portfolios are well positioned for a higher rate environment with a healthy allocation to Real Assets whilst running a relatively low duration in the fixed income space. Rather than write another portfolio construction piece, we thought it would be a good idea to direct you to an article written for Citywire earlier this week which covers our portfolio construction process in more detail. This is the first of a two-part piece with a follow up article to be written and published in early December.
