Inflation in the Eurozone are has hit its highest rate on record this month, that was produces by the on surging energy costs. The data from the Eurostat showed last week that it is likely for the inflation to keep going up before it starts its slow decline. The rate went up to 4.9% in November, one of the highest level in the 25 years since the figure has been monitored, up from 4.1% a month earlier and much higher than the expected 4.5%.
After the historical news on inflation in the Eurozone, we have received some insights and commentaries from professionals within the asset manager industry, as we are all expectant on how this high inflation rates will affect the markets. We have received some analysis of the current situation from Nordea AM, Invesco, Richard Bernstein Advisors and Arcano Partners.
Sebastien Galy, Senior Macro Strategist, at Nordea AM
Growth and inflation are not overly problematic. Inflation should stabilize by the end of the year as supply chain disruptions abate, and the outlook on growth is likely one of moderation in advanced economies as the rush of fiscal and monetary measures ebbs. The real concern is valuations. We expect a continued rally in a selected number of assets that eventually reach a sudden end at the close of 2022. Therein lies the opportunity – first in a continued rally and then in the resulting dispersion in assets.
Laure Peyranne, Head of ETFs for Iberia, Latin America and US Offshore Invesco
Invesco this week released its Gold Report (link), an outlook report on the precious metal to inform the correlation of the asset to inflation, at a time when Spain’s estimated Consumer Price Index (CPI) climbed to 5.6% in November.
Gold is a potential “safe haven asset”, a safety cushion in a portfolio that aims to protect the investor in catastrophic scenarios. In times of heightened volatility, such as during the pandemic, we have seen that gold is a very valuable and potentially safe-haven asset.
Gold historically performs well in inflation, as is the case at the moment: there is a World Gold Council study that says gold has returned 15% on average when inflation was above 3% versus 6% a year when inflation has been below 3%. Gold can offer a hedge against inflation when it is at high levels, which is the current situation.
Michael Contopoulos, Fixed Income Director at Richard Bernstein Advisors
With inflation surprising to the upside and lasting longer than most expect, we believe investors will need to rethink portfolio management and what it means to own a balanced portfolio. Below we address many of the questions related to our view on inflation and its implications for the future.
Prices have clearly surprised to the upside and have already lasted for longer than most expected. In fact, today’s supply disruptions have now surpassed the duration of the 1973/1974 oil embargo. The real question is how long will these inflationary pressures persist? Regarding stagflation, we see nothing in the data to suggest this problem. Stagflation consists of rising unemployment and low growth with higher inflation. Today, and we think for the foreseeable future, we have the opposite: falling unemployment, strong growth, and though high, what will likely be moderating inflation later next year.
Leopoldo Torralba, Senior Economist and Deputy Chief Economist at Arcano Partners, on the issue you mentioned
Inflation, not only in Europe, but in the developed world in general, is at historical levels, especially general inflation, not so much core inflation (without taking into account more volatile elements such as energy and unprocessed food). The key to anticipating the economic future is not only to look at the current indicators of the variables, but also at the future of their catalysts.
There seems to be a clear consensus that the essential cause of the current runaway inflation is the huge jump in demand for goods, caused in turn by the long period of restrictions, especially in the services sector (which prevents the consumption of services and also generates excess savings… which in part is being poured into goods).
All this has put enormous strain on the global supply chain, which is normal when demand rises suddenly and sharply with a rigid supply, which has also been previously reduced by the pandemic. Consequently, it is not surprising that prices for gas, electricity, oil, raw materials, components, transport, etc. have risen sharply.
The question to be answered would be: If the main catalyst for what is happening today, the problematic healthcare environment, also seems to have some consensus that it will be highly solved by 2022, why won’t everything that is happening with inflation be reversed by 2022?
Beyond specific timetables, either from the second quarter or the third quarter of 2022. If the Omicron variant does not exaggeratedly slow down the foreseeable lifting of restrictions in 2022, as should be a central discounted scenario, it would be normal to see a strong consumer preference for services over goods, this effect also driven by the ever-decreasing accumulated savings surplus.
And if the consumption profile shifts drastically from goods to services, it would in turn be normal that far fewer goods would be produced, thereby reducing demand for gas, oil, raw materials, components, transport, etc., and thus lowering prices and thus inflation. Thus, the current high inflation should last for a few months, but in 2022 it should, on average, be significantly lower than it is today, although probably higher than the average of the previous decade, as a result of the powerful fiscal and monetary stimuli that are still latent.