High inflation presents wealth managers and their HNW clients with the challenge of protecting what they have at acceptable levels of risk.

If anyone was in any doubt that US inflation is high and a concern for wealth management asset allocators and their clients, then figures out earlier this week put them to rest. March consumer price inflation came out at 8.5 per cent year-on-year, slightly ahead of market consensus forecasts. The US Federal Reserve is likely to continue hiking rates. Ironically, China is keeping monetary policy loose as Beijing copes with the pandemic and the impact of its zero-Covid policy, as well as concerns about its debt-laden real estate sector. 

How much of the inflation spike is down to the impact of massive quantitative easing since 2008, and policies designed to curb fossil fuel production, as well as the disruptions caused by the pandemic, is one of the biggest political debates today. However, critics of the Biden administration have a problem in pinning much blame on it, because the large expansion of the Federal Reserve’s balance sheet via QE started a decade ago, and did not really decelerate much during the Trump presidency. What’s also clear is that the deflationary impact of importing cheap goods from China – ironically to the fury of those who claim these destroyed Western jobs – has faded as tariffs and structural effects have kicked in. 

This all gives wealth managers a headache. Much of the focus of recent years has been on private markets such as private equity because these are supposedly better at generating risk-adjusted returns than listed equities in a very low rate environment. Government bond yields have been hammered. Real estate prices have been buoyed by QE. So what do managers do? This is also likely to weigh on minds for the rest of this year and into 2023. 

Anyway, here are some views that came in overnight. We will update with more as they arrive. Email tom.burroughes@wealthbriefing.com

David Chao, global market strategist, Asia Pacific (ex-Japan), Invesco
We have already seen substantial monetary policy divergence between China and the US since the start of the pandemic, but we can expect this to go into overdrive over the rest of the year as Beijing policymakers shower the economy with stimulus, while the Fed tightens monetary policy to tackle high inflation.

While the Fed’s inaction last year has led to record-levels of inflation, I’m also a bit concerned about recent, increasingly hawkish statements from Fed officials that could be too pessimistic about taming inflation. I think the Fed should be able to thread the needle as long as it normalises monetary policy slowly and is data-dependent. There is also a possibility that inflation could cool more quickly than anticipated this year which could then provide some more room for Fed tightening. If the Fed is successful in taming inflation without overly tightening financial conditions, then US stocks could tread upwards and the pivot towards value and cyclical sectors could continue.

Harmen Overdijk, chief investment officer, Leo Wealth
Global equities currently trade at 18-times forward earnings. Relative to real bond yields, stocks continue to look reasonably cheap. Valuations are especially attractive outside the US where equities trade at 13.7-times forward earnings. Emerging markets trade at a forward P/E of only 12.1. We think international equity markets can outperform the US market over the next 12 months. In general, international markets perform best in an environment of accelerating growth and a weakening dollar, precisely the environment we expect to prevail in the second half of the year. We continue to favour quality and value stocks.

Silvia Dall’Angelo, senior economist, Federated Hermes
US CPI inflation might have peaked this month, assuming there is no further escalation of the conflict in Ukraine and oil prices evolve in line with the future curve going forward. However, there are still considerable external and domestic price pressures in the pipeline – it will take some time for higher input and labour costs to pass through into consumer prices – meaning that inflation will likely remain sticky at elevated levels for the balance of the year at least. We now expect it to average at 7 per cent this year. Further down the line, stabilisation in energy prices, base effects, an easing of global supply constraints and, crucially, a slowdown in domestic demand should all contribute to reducing inflation quickly. That said, inflation might eventually stabilise above the Fed’s 2 per cent target, to the extent that the pandemic and the war in Ukraine catalysed structural changes in the labour market domestically and in supply chains globally, while a poorly managed green transition would also prove inflationary.

[Tuesday’s] Today’s inflation report on balance validates expectations that the Fed will hike by 50 basis points in May, as already suggested by recent FOMC communication. By the Fed’s own admission, the central bank is behind the curve in its fight against inflation and is eager to catch up with larger rate hikes and the start of quantitative tightening in coming meetings – an uncertain endeavour given that monetary policy affects the real economy with lags of between 12 and 18 months, and it is not fully clear how quantitative easing works. While the Fed still believes they will be able to engineer a soft landing, these rarely occur, and the convergence of cost-push inflation squeezing real incomes, monetary and fiscal tightening could result in a harder-than-desired hit to demand down the line.

Charles Hepworth, investment director, GAM Investments
US inflation continues its inexorable grind higher with a March rise to 8.5 per cent year-on-year, slightly ahead of market expectations of 8.4 per cent. This is reminiscent of a time 40 years ago when I was just a young pup working out how I’d ever gather enough pocket money together to buy this new-fangled thing called a Walkman. The small positive, if there is one to this latest inflation print, is that core prices (which exclude most core things consumers need the most, such as food and energy) rose slightly slower than forecast, at 6.5 per cent year-on-year versus 6.6 per cent expected. 

Russia’s incursion into Ukraine and the subsequent knock-on effects on gas prices had a disproportionate impact – accounting for more than half the monthly gain in the inflation data. Inflation at these levels may be near peaking, as minor evidence of demand destruction exerts itself. It’s a very long road of Federal Reserve rate hikes we will have to travel down before this once ‘transient’ genie is back in the bottle.

Dan Boardman-Weston, CEO and CIO, BRI Wealth Management
The figures will add further pressure on the Fed to accelerate the pace of interest rate increases and potentially hike by 0.50 per cent at the next meeting, as opposed to the traditional 0.25 per cent. However, the significant increases in the cost of living and the interest rate increases will start to have a detrimental impact on the growth outlook for the American economy, which could cause the Fed to divert course throughout the latter half of 2022 or 2023. The Fed has a tricky task ahead and historically it has struggled to battle inflation without lowering economic growth.

Ronald Temple, managing director, co-head of multi-asset and head of US equity, Lazard Asset Management
While it’s encouraging to see the month-on-month core CPI decelerate to only 30 basis points, we are focused on the rising cost of shelter. The cost of shelter excluding hotels rose 4.5 per cent over the prior year, the largest increase since 2007, and we are seeing evidence of accelerating increases in rent across many cities. Higher rent often translates directly to higher wage demands, raising the risk of a wage-price spiral.