You're listening to Strictly Business Podcast with Lindsay Williams.
Inflation has been on a wild ride in the last three years or so, shooting higher as
the war in Europe took hold,
falling back as rising interest rates exerted their influence and now seemingly
stabilising at lower levels.
But is it?
Inflation is proving stubborn and inflation is the enemy, of course, of both
investors and consumers alike.
With me is John Stockford, head of multi-asset income at 91.
in London. It's coming off a low base.
This latest tick-up is coming off a low base, John, but it's causing a little bit
of concern, I think.
Well, I think there are a number of things going on.
So clearly, we've been in an environment where inflation was very high, has come
down a long way,
and there's this concept of the last mile, how easy is it to get inflation back to
target?
There are clearly lots of moving parts.
So Generally, I think service sector inflation looks like it's still slowing,
but we were being helped by goods price deflation.
So, you know, food, energy and other things.
And that's started to pick up a bit.
And then at the background of all of this,
we've got the threat of tariffs from the US and some inevitable inflationary
consequences
if those get implemented, at least in the short term.
So the question then is.
Does that lead to a one-off jump in prices or does it start to feed through into
longer term inflation
and expectations?
It's not really our job to talk about whether inflation is going to go to 5% or
whatever level.
And you said if in that sentence when you were speaking about tariffs and I suppose
the UK as well.
After this morning's energy price rise announcement, inflation will continue to
be a little bit stubborn in the UK,
I think.
But just in case it does go up,
how does one sort of ameliorate the effect of rising inflation in a portfolio or
strategy?
Are there certain asset classes that you immediately go to when inflation starts to
threaten to rise?
Well, it's always been something of a tricky proposition.
So as we saw in 2022,
when sort of inflation was elevated post the pandemic,
that actually pretty much everything went.
down.
And even if you'd bought inflation linked bonds,
they actually got hurt not by the rise in inflation,
but the rise in their yield adjusted for inflation.
And they only sort of helped you a little bit.
So, you know, it's not it's generally people have struggled since the 70s to
properly hedge inflation risk.
Inevitably, people look at hard assets, so things like gold, and then, you know,
commodity.
uh and resources more generally and where they can equities where companies are able
to pass on those
prices to consumers so yeah i mean it's it it's not straightforward i think it partly
is about
reducing risk potentially rather
than just trying to and trying to mitigate the the impact rather than you know using
it as a way to try and
uh potentially make money but we're not quite at that point yet i think it is
though a fear in the back of
investors and markets' minds that, you know, if inflation bottoms and picks up
from here,
that it'll actually start to be a more pernicious longer-term problem for central
banks and for
consumers to deal with.
At what point does the multi-asset income team at 91 start to say, okay, we've got
to take some action here?
Well, I think at the moment it's noise to some extent.
I think you need to also think about what what the other impacts are and how
widespread it is.
So there are definitely economies where inflation is still coming down.
So, for example,
we like bonds in New Zealand where you've got inflation basically at target but
against the
backdrop of an economy that's coming out of recession.
And so there it's not about whether the Reserve Bank will raise rates to respond
to inflation
or it's more about will they cut rates more than expected.
because the economy has been so weakened and there's lots of spare capacity,
unemployment's too high and so on.
And then in somewhere like the US, what's going to be the biggest effect?
Is it going to be that tariffs push up inflation or is it going to be tariffs
plus all of the other
things that Elon Musk and others are doing is actually going to hit growth?
And at the moment, it looks as though the bond market's sort of betting on both.
It's beginning to worry a little bit about inflation in the near term, but it's
starting to worry a little bit more, actually, whether
Trump's initial policy impact could be quite negative for growth.
So there it's about potentially being a bit more defensively positioned.
So I think it's, you know, we're looking around the world for where can we find
reliable income that's reasonably safe that we can take.
exposure to.
And as I said, I think you have to be a little bit more picky, a little bit more
choosy.
I think last year was easier.
Everything was rallying.
This year, I think it's more of a challenge.
What about the equity asset class?
Are there certain stocks or certain classes of stock that are not inflation
proof,
but do better in an inflationary environment?
Well, I think yes, to some extent.
And it's also the other thing we haven't really talked about is fiscal policy
generally.
you know, governments are trying to think about how they prioritize spending, but
generally are, you know,
struggling to balance their books.
And so focusing on areas where, you know, they're more likely to spend, you know, so
for example,
defense stocks in Europe and so on have been doing pretty well recently, because
Europe's going to have to step up and,
you know, take more of the responsibility of defending its borders, because the US
is going to do less.
So there are those kinds of effects.
But then also, I think, yes, where you've got value helps.
So there are definitely stocks.
So consumer staples have been out of favor for a long time.
Everyone's been focused on, you know, the sort of tech,
the Magnificent Seven and the sort of growth and momentum stocks in the US.
I think potentially more defensive stocks, particularly if they have.
strong franchises where they can actually absorb prices and to some extent pass them
on to consumers i think
they they look you know relatively well placed and and it might be an environment
where more defensive
sectors start to do a bit better um
yeah so i i think you've got to you've got to look around and do the work rather than
um just sort of pick
uh broad broad themes or just you know be long long everything well let's just hope
this is all
speculation on our part, John, and inflation comes back down again and
stabilises close to central banks'
target rates.
John, thank you so much for your analysis.
John Stockford is head of multi-asset income at 91 in London.
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