The value of investments can fall as well as rise and losses may be made. With me is Ian Cunningham, co-head of Multi-Asset Growth at 91 in London. Today I want to talk about inflation. I want to talk about recession fears and all the associated implications for a broad set of asset classes and also your strategy at 91.
Let me just give you a couple of figures first because as far as I know, the South African inflation rate is 7.4%, CPI inflation that is. In the Eurozone I think it's 8.6% in the United States it's 9.1% and in the UK again I may have a couple of decimal points in the wrong place but 9.4% if I had suggested these numbers to you five years ago you would have laughed at me. What are you going to say? Yes, no it's highly.
I think it's the path that inflation has taken. It's obviously shocked a lot of people and interestingly I think the market participants have generally been more focused on one side inflation which has been the sort of constraints around supply and obviously everyone believes that as we would get a recovery we would ultimately see so bottlenecks begin to unwind as COVID faded, all the challenges associated with COVID faded and we would see some inflation be more transitory. The other side has been in effect an excess demand problem and an excess demand problem particularly in the US economy and in places in Europe as well has been caused by the massive stimulus checks that were handed out through the initial COVID shock and obviously the broad increase in money supply as well as the second bank so for a place to help asset market sound economy whether the term or through the big consequences of using programs so that the challenge you've had is in some of the US we've seen in the period post COVID sort of the two-year period and we saw money supply go at about 20% per annum which has not happened this time in the second world war and so the problem is when you push that much money into an economy the price of things go up when like on the key pump so that's the total problem we've had and then obviously things begin to feed on that as well as go up and like so yes it's certainly been a period we never thought we'd see five years ago. No absolutely right and of course you talk about the challenges that you have and the man and woman in the street in various jurisdictions have as well every single day what about the poor central bankers who have either been behind the curve slightly ahead of the curve or just not even looking at the curve and just saying to themselves well we have to contain inflation because that's our mandate but on the other hand there's a recession looming so we can't raise rates there's so many different moving parts to this thing do you think they're handling themselves correctly?
I think they're getting that if you're asking that question nine months ago we would have said what they're doing is a bit bonkers in the sense of the federal reserve was still actually printing money in January of this year and they've effectively had to do sort of a handbrake policy term so we would have said nine months ago they were they were a long way behind the curve so the label market was getting very very tight inflation was obviously beginning to accelerate wage growth was very strong and as I said it was still still easing policy whilst all that was taking place and obviously now what they've done is done the biggest policy adjustment we've seen in decades so rapid increase of um of Fed funds rate as well as we've seen in many other other emerging markets and develop markets around the world now I think interestingly on your point on the curve and where central banks it would actually say at the moment it looks like the Fed and some other central banks are actually either in line with the curve or potentially slightly ahead of it because I mentioned money supplies so monetary aggregate sort of stalling in the US and M2 money supplies not grown in six months now we're seeing inflation expectations in market begins for and we're seeing leaving in the case of growth begin to actually turn over quite quickly so as you say we're now entering a phase of central banks are going to be experiencing slowing growth and ultimately they're looking at something that's a bit backward looking which is is inflation so there is a pretty reasonable probability that they are still going to be maintaining type of policy or typing policy whilst we see growth begin to slow which has obviously implications for asset markets let's have a look at the implications on asset classes and before we get to your strategies please Ian all over the place the markets at the moment yes when we as you sort of alluded to before I think nine months ago our main concern coming into this year was that central banks were way behind the curve and they needed to adjust policy to get get ahead of gurve infecting get controlled inflation given their objectives and if you saw that beginning to play out we're expected that to play out then asset markets were incomplete in the wrong place in terms of valuation so you had the highest multiples in decades since the the tech bubble in the early 2000s on equities and you had the only also basically still on the floor and obviously the implication is that central banks lift discount rates on yields that was obviously placing kind of place downward pressure on multiples within within markets and you see sort of evaluation reset so in effect if you think about sort of the risk return curve in terms of expected returns government bonds across all asset classes up to equities that efficient frontier was very flat in terms of expected returns and basically the whole thing shifting higher as central banks move away from this very easy policy towards a far more tight policy which we will certainly see at the end of this year through Fed funds in particular being sort of about three and a half percent and with sort of half a trillion being run off the Fed's balance sheet so there's obviously been that big reset so far and then obviously the questions we move forward is sort of how deep is slow down going to be yes I think that's one of the many things that to consume us every single day one of the words that we've used on three occasions during this few minutes of podcast is implication or implications what are the implications for your strategies at 91 so our multi-asset strategies have been much lower than average equity exposure coming into this year and through this year and they've had much lower than average frequency and coming to the exposure as well and obviously the balance means that they've had quite healthy applications to to cash and then within within currency positioning as well we've had to view that since the summer of last year that we would see policy divergence and macro driven divergence on the basis that China was slowing after they did a lot of tightening last year and we would see them move towards a more easy policy through this year whilst we expected the Fed to go hardest off with major central banks given how tight late market was and the other inflation pressures sitting within the US economy and as a result that we believe the dollar would strengthen quite notably so to be in effect the portfolios have been underway equities underway fixed income long cash and long off long US dollars now we've made some quite substantial changes in recent months so equities have increased a little bit as we began to take advantage of some areas where valuations become very discounted particularly in the Asian region the currency risk has been been collapsed within the strategy so we've we've exercised towards long dollar positions that we have in Asian currencies and European currencies on the basis that we think it's the dollar's pretty well priced now in terms of policy divergence against those major currencies and within fixed income we've actually been increasing exposure to fixed income particularly sovereign bonds in developed world and particularly sovereign bonds of those countries that have quite enormous housing and household leverage and balances and that's countries like Canada, Australia, New Zealand, Korea and we're doing that ultimately because we see these signs that both growth is now slowing and there are early signs that pricing pressures are beginning to slow as well and usually when you have a negative environment for both growth and inflation that's more supportive of government bond yields in terms of moving moving lower so we've effectively increased our exposure to fixed income through defensive rates to a more average level. It's quite interesting isn't it because here we are talking about the business headlines coming to the front pages of publications with the inflation story and the cost of living story and now suddenly in the years time perhaps as is being predicted by many experts it goes back to normal how the markets will react to that and that's of course something that you at 91 will be watching very very closely and thank you very much for your time in Cunningham it's co-head of Multi-Assy Growth at 91 in London. This podcast is a marketing communication and is provided for general information only and assumes a certain level of knowledge or financial markets it is not an invitation to make an investment and should not be construed as advice. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of 91.
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