At FT, Pascal Blanque, explains that inflation is imminent and that investors must prepare themselves for what’s to come. He writes:
A change in market regime often occurs with a change in the mandate of central banks. The central focus on inflation targeting that started with the arrival of Paul Volcker at the helm of the Fed in 1979 is fading. This much is clear from the new priorities recently adopted by two central banks: achieving full and inclusive employment by the Fed and reducing global warming by the Bank of England.
For investors, this means the rise in bond yields might not be over yet, but its speed may slow down. Take the 2013 taper tantrum in bond markets which followed signals of reduced Fed support. More than two-thirds of the correction happened in the first three months. We believe this might be the case again, with the rest coming after the summer, once economic data reveal the true health of the US economy and its inflation path. The Fed’s role in distorting asset prices is set to diminish as market forces reassert themselves.
As this occurs, expect further gains in so-called value stocks — companies that are considered undervalued compared with their assets or earnings. The first part of a multiyear rotation towards value happened in November in the wake of the positive vaccine news. This resulted in a straightforward re-rating for value stocks from their very depressed levels. Like the recent uptick in inflation, this is not just another blip.
In the long-awaited moment of value stock revenge, investors should pay attention to cyclical names in Europe or companies in the US that can benefit from technological transformation and the energy transition.
The return of inflation could help ease the debt burden. But it will be hard to swallow since it arbitrarily transfers wealth from savers to borrowers. Investors need to prepare themselves for this shift by seeking value stocks rather than chasing new fads.
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