Investment Strategies

How The Pandemic, Inflation And China Will Affect Financial Markets

Charles Paikert, New York, October 21, 2021

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Putting investment returns on the table at a time when inflationary pressures - and higher interest rates from historically low levels - are a concern, is going to take more work. This news service reports on comments taken from a recent annual Charles Schwab conference.

Get ready to work harder for investment returns.

A different world on the other side of the global pandemic with less globalization and more concerns about inflation - and China - mean that asset managers will have to adjust to new realities, according to panelists at Charles Schwab’s annual Impact conference.

“The recovery has been delayed, not derailed,” said Sebastien Page, head of global multi-asset for T Rowe Price.

T Rowe is “slightly” under weighing stocks in its 60/40 portfolio, but is still convinced that the recovery has enough room to run to meet its targets, Page said.

Stock market bears, according to Page, assert that “every inch of the recovery will be taken away” as the “massive liquidity” in the market driven by unprecedented government stimulus fades and the US Federal Reserve begins to “taper” by slowing its bond purchases and reducing its quantitative easing.

Glass half full
But there’s a strong case for continuing asset gains, Page argued. The Delta variant of COVID-19 is likely to decline within six to eight months, vaccinations will increase, supply chains should improve and consumers remain “flush with cash,” with around $2 trillion sitting on the sidelines, Page said.

The global economy may be facing declining growth, but it’s “still very high growth,” he noted.

Despite a disappointing third quarter, equities are still expected to provide the “best returns,” according to Market Street Trust Company, which issued its third quarter investment review the same day as the Schwab panel.

“We continue to believe that the extraordinary amount of fiscal and monetary stimulus has created economic growth conditions that are not quite yet in the final innings,” Robert White, Market Street’s director of investments, said in the report.

Should inflation be feared?
While inflation is a top-of-mind concern for consumers and economists, both T Rowe and Market Street analysts conclude that investors may not have much to fear.

The inflation debate currently centers on whether higher prices will be transitory or persistent, Page said. He believes that inflation will “settle back higher than before” but with enough “downward pressure” from tech innovation and cheap outsourcing of consumer goods to not go off the rails.

While a growing concern for investors, inflation is “not usually a harbinger of poor equity returns,” according to Market Street’s White.

“While inflation indirectly increases the discount rate used in equity valuation models, resulting in lower stock prices, inflation also drives corporate profits higher and increases nominal consumer net worth,” he stated. “Indeed, rising wages, rocketing consumer net worth, substantial excess savings, and strong corporate pricing power, all point to the likelihood that corporate profitability and earnings will continue to surprise to the upside.”
 

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