Higher Inflation and the dilemma for central banks
Mark Nash discusses the difficult choices facing central banks as inflation lingers and what it might mean for absolute return bond strategies.
It’s time for everyone to do more for themselves. No more Russian energy for Europe or cheap goods from China. Nations are increasingly building capacities within their borders following the supply chain debacle caused due to reliance on China during the pandemic. This should result in more capex and more fiscal spending in the west. Europe hasn’t done this very well so far. Eventually, we can get to a place where growth should be better, demand will improve and as long as countries can cope with that higher demand – with more workers and better productivity – all will be well. Inflation will never completely go away, however.
Many investors today haven’t experienced these kinds of markets; they only know low inflation. Investing strategy has to be different now. Managing fixed income assets in an unpredictable macro environment calls for a lot of flexibility. The 60-40 portfolio model (60% equities, 40% fixed income) with long-only equities and bonds, used to be effective. Now it’s about relative value, bottom-up selection for stocks, credit and sovereigns and finding relative value. We see it as a new world and an excellent opportunity for absolute return strategies.
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