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Is resurgent inflation on the horizon?

14 January 2021

Smith & Williamson Investment Management has added BlackRock Gold & General to its Managed Portfolio Service (MPS) in anticipation of resurgent inflation over the next few years. 

While many drivers of inflation went into reverse in 2020 as global economies dealt with the fall out from the Covid-19 pandemic, the outlook has shifted according to James Burns, co-manager of Smith & Williamson Investment Management’s MPS.

Burns said: “BlackRock Gold & General has been introduced across the range and plays to our medium-term view that increased inflation is likely, which should benefit the gold price. The key driver of this view is the outsized impact of policy, particularly the deployment of fiscal measures on top of the monetary stimulus that has been repeatedly used over the last decade.”

Burns believes tail-risks of significant inflation may also be tilted to the upside, with the risk that policymakers may be building up more significant challenges in the long-term and the reaction function of central banks and governments will be too slow.

The team expect gold and precious metal securities to provide some protection in challenging markets.

Burns adds: “While inflation was a consideration, gold is also a means of diversifying returns in this environment.”

Graham Campbell, co-manager, TB Saracen Global Income and Growth Fund, said that while investors had been used to the ‘Goldilocks scenario’, where growth has not been too high and productivity improvements have kept inflation in check, the sharp economic downturn could upset the balance.

Campbell explains: “Those with memories of the 1970s and 1980s will remember how difficult it was for governments to subside inflation once it got out of the bottle. With Democrats now having a clean sweep over the White House, Senate and House of Representatives, it is likely the US will continue to increase public spending, adding to inflationary concerns.”

Campbell said that despite the huge fiscal stimulus and money supply expansion, the 10-year bond yield remains flat, with the recession forcing the close relationship between inflation and bond yields to break down. He anticipates inflation expectations will need to collapse along with real economic growth or bond yields will have to rise to meet rising inflationary expectations, with the possibility of a combination of both.

Campbell said: “The risk appears to be with bond yields; further steepening would likely be supportive to banks and cyclical businesses.”

He added: “We contend global growth is picking up and will be sustainable.  There has been a notable improvement in the performance of more economically cyclical ‘value’ and financial shares and believe this has much further to run and it is possible businesses will be re-rated into rising earnings.”

 

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