Investment strategy

November 14, 2021

The fear of inflation: Portfolio impacts and potential opportunities

November 14, 2021

David Bailin

Chief Investment Officer and Global Head of Investments

Steven Wieting

SUMMARY

In many respects, the US economy is in great shape. But that’s not what most Americans think. Their economic anxieties can be attributed to one issue – inflation. However, we believe long-term portfolio growth opportunities will be not significantly derailed by the levels of inflation we expect in the future.

For a consumer, inflation is a tangible, visceral problem. Robert J. Shiller’s suggested that inflation causes people to lose confidence in their ability to “keep up” and to lose faith in their policymaker’s ability to help them.

Ironically, the good decisions made by governments during the pandemic are the very reason for the economic health of most Americans and, in part, are the cause of this temporary burst of severe inflation.

In the past, large spikes in inflation have ended economic expansions. Looking ahead, we see very-solid gains in overall US employment, even as the balance sheets of households are improving. We believe incomes will stay ahead of temporary price shocks. In short, we continue to believe the recovery in US business and employment will outlast and outrun the inflation spike.

Inflation has been with us as long as there has been money. Outright deflation has been rare, and governments know much better how to inflate (weakening the value of money) than to manage long-term structural challenges.

The degree to which inflation rises and falls is a major factor for consumers and impacts their behavior and confidence levels significantly. Our expectation is that the last decade’s inflation rate - just below 2% and the lowest since the 1930s – marked a secular low point. We expect somewhat higher levels of inflation in the decade to come. That said, the present burst of inflation is largely due to the extraordinary measures taken by governments to ensure the safety of individuals and businesses during the pandemic.

Recent inflationary concerns and bond price responses have negatively impacted a variety of secular growth industries such as fintech, greentech, medtech and cybersecurity. We don’t believe these long-term growth opportunities will be significantly derailed by the levels of inflation we expect in the future.

In particular, investments in fintech are timely and anti-inflationary. Just how radical is the ongoing shift to vintech? The total market cap of the largest US payments-focused fintech companies has now exceeded the entire Russell 2000 bank index.

CIO Strategy Bulletin (PDF 563.15 KB)

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The fear of inflation: Portfolio impacts and potential opportunities

SUMMARY

Insights

Insights