This news service recently interviewed the US wealth management house about its views on the markets, including concerns about inflation and what HNW clients should do about it.

As inflation worries grow, some US wealth managers have rotated into areas such as commodities and parts of the equity market to get protection.

CIBC Private Wealth, the firm with $83 billion in assets under management and administration, doesn’t fear a return of 1970s-style double-digit inflation, but it does expect various forces to push price pressures higher. And it is acting accordingly.

“The core question to solve is how do you address the narrative of massive policy stimulus and the liquidity of extended valuations?” David Donabedian, chief investment officer, CIBC Private Wealth, told this publication in a recent call.

“We are seeing all this liquidity starting to have a meaningful impact on the real economy. This is going to lead to a boom in corporate earnings that has staying power into 2022,” he continued. 

“We have been overweight equities versus fixed income,” he said. 

Tactics
On a tactical asset allocation view, CIBC Private Wealth has started to build inflation hedging, such as cutting fixed income, moving to commodities, industrials, precious metals and agriculture.

The firm has also gone into preferred securities – this is a yield play. (Preferreds are a hybrid between a stock and a bond. They are more interest rate sensitive than correlated with the stock market, and offer yields well above core bonds or equities.)

CIBC also likes assets such as floating rate notes – holders will not suffer if the Fed raises rates, he said. 

Inflation questions
Donabedian said clients are asking if the equity market is overvalued and have questions about inflation pressures, as highlighted by some recent figures. 

The US consumer price index jumped by 4.2 per cent in April compared with the level one year ago. That was the highest consumer inflation rate since 2008. The global situation is similar. Energy price hikes boosted average annual inflation across OECD countries to 3.3 per cent in April, compared with 2.4 per cent in March, the Paris-based organization said Wednesday. That's the fastest rate since October 2008. When energy costs are stripped out, prices still rose, figures showed. Some economists and policymakers are worried. Former US Treasury Secretary Lawrence Summers has warned that the US economy is at risk of overheating, following the US administration's promised multi-trillion stimulus and infrastructure packages.

CIBC's Donabedian doesn’t think double-digit inflation is back, but there are risks. “The economic background is very different, such as labour markets and demographics. There is more globalisation,” he said. 

Clients are fully invested and “we are not recommending them to keep cash on the side,” he said. “What we recommend is that for clients who let their equity portfolio run over the last year, it might be appropriate to rebalance.”

There’s been a strong theme of wealth managers holding more private market asset classes in recent years as the search for yield has been intensified because of very low/negative interest rates. 

Donabedian said that growth-orientated investors should hold private market investments. But they need to pick their shots. The large private equity buyout sector has a lot of money chasing it and valuations aren’t attractive; CIBC PW prefers smaller and mid-size areas.

“You have to have access to the top 20 per cent of managers to make it worth your while,” he said. The firm also likes parts of the private credit space.

No conversation with such a firm would be complete without asking about the tax and regulatory landscape. With the Joe Biden administration looking to double capital gains taxes on HNW individuals, for example, what’s the CIBC position?

“We are getting lots of questions about the Biden administration’s fiscal policy. The end-result of this is that taxes are going up, but less than the President’s opening bid,” Donabedian said. 

He expects more debt and more pressure on the US Treasury market as concerns persist about the fiscal and debt position. 

The history of capital gains tax rate rises has been that they don’t collect more revenue; this is more about equity than revenue-raising, he said. Donabedian added that a doubling of the CGT rate was unlikely and he would be “shocked” if that were the case.

In April last year CIBC Private Wealth made a raft of appointments.