Markets continued their positive trajectory in April with strong returns generated across Australian and Global Equities, with listed Real Estate performing particularly well. Despite the strong returns, inflation concerns continue to dominate the market narrative. There are concerns that the so-called ‘reflation trade’, which has been supported by accommodative monetary policy and significant fiscal support, may have overshot as economies begin to open-up. As a result, we have seen commodity prices rise, with oil and base metal prices all appreciating.
The question is whether the rise in inflation is transitory, and that the current trend in prices is simply a function of economies making up for lost time due to COVID, or are we witnessing a structural trend in rising inflation. There is no question that there are supply and demand pressures pushing prices of certain goods and services up. However, Lonsec’s current view is that while we expect inflation to rise in the short-term, particularly in the US, our expectation is that the rise will be within range, and the risk of an out-of-control spike in inflation is not our base case.
Wage growth continues to be sluggish and broader structural deflationary pressures such as the continual technological developments impacting many industries will potentially suppress prices over the long-term. The main risk to this view is that central banks are behind the curve and allow inflation to run beyond manageable levels in their quest to stimulate growth.
From a portfolio perspective, modest inflation is generally positive for Equities. We have maintained our portfolios’ exposure to diversifying assets should inflation come through higher than expected, notably via our exposure to Gold and Inflation Linked Bonds.
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