Amid hopes of rebound, inflation worries brew in global markets

Dubai: While the year ahead looks promising for stock markets, prominently fuelled by stronger-than-expected global economic recovery, investors tread cautiously as shares are largely recoiling worldwide.

“The next year looks extremely positive for risk assets with strong economic growth coupled with monetary and fiscal stimulus,” noted Paul Doyle, head of Europe (excluding UK) equities at Columbia Threadneedle Investments.

“Consumers will start to travel and spend again, thanks to the savings they racked up during the various lockdowns.”

Sell-off in markets

Global share markets are, however, currently witnessing a major selloff, which worries investors who have been widely investing in international markets. Adding to their woes, experts believe that equities globally will be volatile till the debt markets settle down.

“Value stocks outperformed momentum by almost 30 per cent in November, but then gave back a third of this by the beginning of 2021,” added Doyle.

“For the first time since the global financial crisis, US inflation expectations have risen above that for the subsequent five years,” Doyle wrote. “Though currently small, it indicates that investors are beginning to consider a return of inflation over the medium term.”

US inflation fears weigh

There has been an uptick in the US treasury yields with the 10 years spiking up from 0.93 per cent at the start of the year to over 1.5 per cent during the last couple of weeks.

Analysts widely have been voicing concerns that the rise in treasury yields is leading to the adverse impact being seen in equity markets, especially growth stock which includes technology. Doyle further added that the key issue is not the level of yields but the reason for any move.

“If yields are moving up due to convergence, easing of trade disputes, commodity prices rising, the money supply rising in China and elsewhere, and PMIs moving up sustainably, then the rise in yields will be perceived positively,” Doyle wrote in a note.

As COVID-19 vaccination programs in the US and Europe are progressing at a good pace and economic recovery is expected to pick up at a faster pace than previously forecast, investment managers believe investors should stay focused on their asset allocation plans and not worry about timing the markets.

No reason to panic

“For this reason, we don’t believe a move in the US 10-year yield – for example a rise from 1 per cent to 1.5 per cent or even 1.75 per cent – should necessarily be taken as a negative,” added Doyle. “The consensus is that there will be no meaningful inflation and bond yields cannot go up very much.

“Central banks got even more involved during the pandemic, meaning bond yields might not double but just back up to 1.5 per cent, for example.”

Doyle further noted that despite another surge in COVID-19 cases and lockdowns all over Europe, actual economic data is improving, with French consumer confidence having improved in December 2020, and German retail sales and factory orders also improving.

US economy recovering

The US manufacturing survey for December was strong and in mid-December forecasts indicate 9 per cent GDP growth for fourth-quarter 2020 as well as a very strong first-quarter 2021, given the recently passed fiscal stimulus in the world’s largest economy, the US.

“In terms of sectors, cyclical technology such as semiconductors should do well,” Doyle added.

“Regulatory tightening will be limited to enforcement actions and executive orders rather than wholesale regulation of technology. Financials obviously benefit from rising yields. Utilities are also attractive because of the green agenda.”

Cen bank actions to abate

Central bankers worldwide have no plans to cut back on money-printing any time soon, let alone raise interest rates.

Doyle further noted that central banks might not want to do more but governments most likely will, while adding that the second half of the year will begin with stronger PMIs and hopefully no more COVID-19 shocks.

They are prepared to over-shoot inflation targets as they battle rapidly falling prices. With yields having risen recently on concerns that government spending globally to support economies could push inflation above central bank targets more quickly than expected.

How inflation can factor in

“Central banks will not reverse their current policies even if they do not do more monetary easing, and will increasingly fall behind the curve,” evaluated Doyle. “This is already showing up in wild swings in Bitcoin and the volume of IPOs.”

Doyle added that bank lending standards are easing and that the ability of banks to support the economy is normalising.

“It is hardly surprising that the credit market is in fine fettle given that the money supply is ballooning everywhere,” Doyle further wrote. “The velocity of money collapsed last year. But if it stabilises and then picks up, it is likely to lead to inflationary pressures.”

Brace for more surprises?

“Global economic surprise indices remain very high,” noted Doyle. “They have been for six months but show no sign of rolling over.”

Surprise indices measure the pace at which economic indicators are coming in ahead of or below consensus forecasts. When the index is negative, it means that the majority of reports are coming in below expectations, while a positive reading indicates that most data is coming in ahead of expectations.

“Earnings surprises tend to follow economic surprises over time, and while earnings revisions are at 10-year highs they are still lagging economic surprises. This suggests the risk to consensus is on the upside not the downside,” Doyle further added.