Global markets went into meltdown in February amid expectations that inflation is making a comeback. Investors and market participants were in a frenzy as to when and how quickly inflation will return.
While the encouraging signs of global economic re-openings and the potential massive fiscal stimulus have been welcomed in some sectors, government bond markets saw massive sell-offs.
However, ANZ’s Chief Investment Office says while near-term inflation may rise further from its current levels, it doesn’t expect inflation to materialise in a sustained manner until at least 2022.
In the meantime, financial markets and central banks appear to be at a stand-off as to who will blink first. Global central banks have maintained their commitment to loose monetary policy in the near-term.
Given this supportive policy direction, we view the current concerns surrounding rising rates as overstated — particularly given unemployment levels remain below their pre-pandemic peak and outputs gaps exist globally.
Despite the recent volatility, equities have continued to outperform. And while valuations remain challenging, markets have been buoyed by growth prospects on the back of successful vaccination roll-outs and falling COVID-19 infection rates.
Within the equity market, we see a continued outperformance of ‘value’ stocks in the short term, as the re-opening of economies supports cyclical industries which were suppressed by COVID restrictions.
‘Growth’ stocks are typically driven by longer-term dynamics, making them more sensitive to a higher discount rate. Put simply, if rates rise, growth stocks are typically hit hardest.