SUMMARY
Just when inflationary pressures were beginning to abate, near-term challenges like geopolitical tensions with Russia and the Canadian truckers' protest are muddying the waters. But we see reasons to be positive about China and believe global portfolios should diversify into markets with lower policy risk.
- The latest inflation data showed a 7.5% rise in consumer prices over the last 12 months, with 1.6% of that increase attributed to used-car prices alone. Stubborn supply-chain troubles are not quite done handicapping economic flows, and now a growing list of external factors might delay a return to normal pricing and more balanced levels of supplies for goods.
- For one, while now still just a threat, a Russian invasion of Ukraine would impact the world economy, energy and wheat prices in particular. Another is the trucker protest in Canada which has shut a key supply route to the US that has hit auto manufacturing capacity. While the blockade is likely to resolve in the near-term, US car and truck production might weaken in February-March.
- Another ongoing shift – the so-called Great Resignation – has seemed to permanently change people's expectations of work. The premiums many companies are paying to hire and retain employees will continue; but real wage gains will be offset so long as inflation runs higher than expected, compounding wage pressures for longer.
- What concerns us is that the near-term environment may provide more fuel for Fed action even as underlying inflationary pressures ease. Recent comments by Fed officials sounded as though some Fed policymakers believe they need to take emergency steps to unwind their own easing steps.
- While additional shocks are possible, the real risk is an overreaction to the elongation of inflationary pressures that are beyond the Fed’s control.
- And while the Fed embarks on its tightening regime, China is going in the other direction. China has begun to ease its monetary policy after macro-economic and regulatory tightening in 2021 curbed economic growth.
- We see several reasons to be positive on China now and believe global portfolios should diversify into markets with lower policy risk like China. And as such we recently added to the overweight of Chinese equities.
