Alberto Gallo, partner and portfolio manager, Algebris UK Limited
Expects inflation to settle “structurally above” Fed target; short emerging-market and U.K. credit
“The short story is that Goldilocks is ending. This is a great time to layer short positions. Credit overall remains nearly priced for perfection, on the assumption that central banks will always be there to support the market. But this assumption is centered upon the idea that inflation will be transitory.
“While credit risk is a major driver of returns for junk bonds, rising rates will actually hurt them as this pushes up refinancing costs. With an increase in labor and commodity prices, that’s a double punch. We have a number of short positions in emerging-market and U.K. credits. U.S. high yields are vulnerable as the Fed might have to accelerate its tightening pace. However, consumer demand remains strong.”
Victoria Fernandez, chief market strategist, Crossmark Global Investments
Wages and rents to remain sticky; short duration; cuts large techs; increases value stocks
“Wages and rents are two areas we think are going to be sticky in inflation and continue to push it higher. We are still in a labor shortage. We anticipate we are going to see rents move higher following the rise in housing.
“In our fixed-income portfolios, we’ve been short duration relative to our benchmark. If inflation expectations continue to grow we should see the longer end of the curve move higher. On the equity side, we’ve trimmed some of the large tech growth names and we’ve had and tried to build out a more balance portfolio with some more cyclical/value names.”
Stephen Jen, chief executive officer, Eurizon SLJ Capital
Inflation driven by one-off factors; sees property as good hedges
“Gold has stopped moving higher, despite inflation. This may suggest gold is telling us inflation is not real or sustainable. Other assets, especially like crypto currencies, are still buoyant. That suggests some investors are treating them, instead of gold, as hedges against the indiscretions of central banks. Properties may also be good hedges, given the low rate environment and the prospect of investors shifting their exposures from stocks and bonds.
“This inflation surge is transitory in nature but not too transitory in terms of duration. The causes are not indefinite. To the extent that inflation is transitory in nature, what the central banks are doing -- not aggressively tightening into this phase of the recovery -- is correct. But in the event that the process becomes self-fulfilling as wages become de facto indexed to overall inflation, then the central banks will have made a policy error by tolerating this spike. At this point, I have a more innocuous read on inflation in the long-run.”
John Bilton, head of global multi-asset strategy, J.P. Morgan Asset Management
Expects above-trend growth and transitory inflation; overweight equities
“We expect some of the recent supply-chain issues to ease over the next couple of quarters. Separately, as labor force participation picks up, we expect some limit to wage pressures. Certainly there are some risks; inflation in shelter and some other services categories is likely to be more enduring.
“Our base-case expectation is that inflation drops a little more quickly in 2022 than the market currently expects, allowing the Fed to stay on hold in pursuit of its maximum employment goal. The big-picture story globally is that monetary policy is past its point of maximum stimulus. Rate hikes are approaching in many places but will likely remain accommodative for quite some time to come. We remain pro-risk, preferring to be overweight equities rather than underweight bonds.”
--With assistance from Sid Verma.
This article was provided by Bloomberg News.