Over the past quarter, inflation and investment has dominated the financial news cycle. All eyes will be on Jackson Hole this week for the latest update from Fed Chair Jerome Powell as investors look to read the tea leaves as to when the Fed will start to taper, particularly in light of the drop in unemployment claims and increase in Core CPI since the last FOMC meeting.
Until recently, the consensus from investment managers and economists at the Fed was that inflationary pressures are “transitory,” caused by backlogs in supply chains and changes in consumer demand during the pandemic that will ease as the economy begins to reopen. But, after a decline in inflation over the past four decades, since the mid-80s, some investors are starting to wonder whether central bank intervention and the pandemic could prompt a new era of higher inflation.
For experts in the financial markets and asset management, including strategists, portfolio managers and chief investment officers, this creates new opportunities for thought leadership in financial services on how inflation will impact the investment landscape.
Transitory or here to stay?
At the latest FOMC meeting, Powell said he believes the US economy still has some way to recover before the central bank makes any moves to change its policy, and that inflation will moderate.
Not everyone agrees with the Fed’s assessment. BlackRock CEO Larry Fink said in a recent interview with CNBC Squawk Box: “It is my view that inflation is going to be more systematical… I believe it is a fundamental, foundational change in how we navigate economic policy.” Fink argues that America is moving away from post-WWII economic policy based on consumerism, and that jobs, national security and manufacturing growth are more important, which will lead to higher inflation.
Fink isn’t alone in his thinking on inflation. His counterpart over at JPMorgan Chase, CEO Jamie Dimon, shared the sentiment, saying “you have a very good chance inflation will be more than transitory,” and that the bank is stockpiling $500 billion in cash on its balance sheet waiting for opportunities to invest at higher rates. More broadly, a July survey of economists by The Wall Street Journal found that on average respondents expected an average annual increase in inflation of 2.58% from 2021 through 2023, “putting inflation at levels last seen in 1993.”
If inflation is here to stay, then asset managers could potentially be entering a period when the investment philosophy that has held over the past four decades – investing in a low-rate, low-yield environment – will be challenged. Inflation could have far-reaching implications, ranging from changes in monetary and fiscal policy to consumer spending habits.
Taking a stance on inflation
While higher inflation can be challenging terms of managing assets, a major shift in the economic landscape will result in opportunities for asset managers to distinguish themselves from their peers on thought leadership in financial services about what is driving the markets. Even for managers with a more conservative investment approach, who don’t necessarily want to speculate wildly about inflationary pressures, there are opportunities to discuss potential ramifications across sectors and asset classes.
Economists and strategists at asset managers can speak to how different sectors of the US economy are affecting inflationary measures, and what that can mean going forward as supply-demand dynamics evolve. Doug Peta, Chief US Investment Strategist at BCA Research, the global independent investment research firm, argued that stocks are in a “goldilocks scenario” in a webinar to clients. His views were picked up in this article by Business Insider for a feature article, which highlights his call that the S&P 500 is “more likely to climb 10% and hit 5,000 than suffer a correction.” Doug’s view that “inflation should be investors’ biggest concern if the economy starts overheat” adds some temperance to that outlook, although he agrees with the Fed that inflation is likely transitory.
Likewise, CIOs and portfolio managers can address the implications of inflationary pressures on their portfolios at a deeper asset class level. In an opinion piece for Pensions & Investments in April of this year, Jake Remley, a senior portfolio manager at Income Research + Management, shared how fixed income investors can protect their portfolios from inflationary shocks by investing in TIPS, despite yields that were (and still are) negative. As Jake put it, “simply parking cash in money markets yielding effectively zero misses the point. Such a decision may avoid mark-to-market risk, but it invites maximum purchasing power erosion.”
These comments go deeper than the debate on whether inflation is transitory or permanent – one that is best left to the CNBC talking heads – and instead carve out a niche in how inflation could have real, tangible impacts for investors on market and their portfolios. Clients and news media alike will certainly appreciate the deeper, differentiated discourse.
Top tips for differentiating your thought leadership in financial services on inflation
Find your niche
- How does inflation impact the asset classes/sectors you work directly with?
- Limit commentary to what’s relevant; going too broad can mean your differentiated views get buried among the more mainstream commentary on inflation and rate hikes.
- Don’t try to encapsulate your thoughts in one opinion piece or client note. Breaking it out into shorter commentary on a specific investment angle will be more impactful.
- Maintain a calendar of economic events, such as FOMC meetings, CPI/PMI data and jobs reports, and plan commentary accordingly.
- Be prepared with a rough outline of your commentary prior to data releases or Fed meetings, so you’re ready to make quick edits and release information in a timely manner following the conclusion of the meeting. Most reporters want commentary within 30 minutes of the news.
- Proactively engage with reporters ahead of time, so that they keep an eye out for your commentary when you do publish.
- What are the broader implications of the impacts from inflation on your asset class/sector?
- Does it change/alter the way you are thinking about key strategic objectives?
- What does it mean for the economy or society at large?