Given the speed of events and economic news over recent months, this column returns to the issue of inflation and growth given the continuing disconnect between sentiment and fundamentals as to the outlook – policymakers underestimating the strength of the former, and the weakness of the latter. Relative to portfolio remits, such issues affect not just the extent and nature of exposure to other alternative asset classes, but also the equity strategies employed. Investors need to ensure their portfolios are positioned accordingly, and be prepared to take advantage of the opportunities created.
Despite recent economic headlines, in essence little has changed since I suggested early last year that the consensus view was wrong in believing disinflation was the greater danger – the column (‘Preparing for inflation’, IC, 12 March 2021) highlighted the reasoning. Counter-balancing forces were already at work. In the Alice in Wonderland world of quantitative easing (QE) and artificially low interest rates, economic reality and asset prices were always going to be distorted. Despite talk of deficits being reduced, the money kept being printed and debt across the developed world kept rising.
Policymakers were relaxed because borrowing costs were low – low gilt yields in part reflected substantial purchases by governments using their printed money. Meanwhile, given the extent of debt, it was in governments’ interest to keep interest rates low. The combination of high debt and huge tax-and-spend agendas has contributed to economic growth being sparse by historical standards, living standards falling for the majority and inflation now being upon us with a vengeance.