Using active management to manage inflation

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Inflation remains a driver of stock speculation and investor concerns, as it has for much of the year. With inflation continuing to persist, Rowe Price believes investors should expect higher premiums to account for inflation, according to a recent white paper.

Inflation continues to reach new highs in developed markets around the world as economies struggle to reopen, supply chain issues put pressure on and energy prices soar ahead of the winter, exacerbated by natural gas supply problems. The tightening is being felt around the world; in the UK, price pressures are nearing 10-year highs, and in the US, annual consumer prices are at their highest since the 2008 financial crisis, hitting over 5%.

“Given the conditions, it may be prudent for bond investors to factor in a higher premium for inflation risk,” says Arif Husain, portfolio manager and head of international fixed income at T. Rowe Price .

Bond markets are currently positioned with interest rates close to their all-time low, reflecting the belief of most investors that sustained inflation is only temporary. It is a belief that Husain’s warnings will become increasingly risky over time if prices maintain their current highs.

In addition, central banks in developed markets take a largely hands-off approach to rising inflation, seeing it as transient and potentially encouraging higher levels of inflation.

“The current surge in prices could represent a potential opportunity for some developed central banks to reset inflation expectations upwards after years of failure to meet their price target,” Husain explains.

An active management approach allows flexibility in response to changing pressures and inflationary environments. The year has already seen the need for a variety of approaches, with the first three months focusing on underweight duration positions which should benefit from rising inflation in the US and UK, while the mid-year changes meant that short-term US inflation-linked bonds performed well.

This trend of duration underweighting based on inflationary pressures has played out globally, in developed and emerging markets, and continues to be an approach that investors can capitalize on in many ways. Emerging Markets.

An alternative investment opportunity also lies in short-term positioning in developed countries where price increases could be considered more “structural”, Husain believes. Prices are only expected to rise with the growing labor shortage exacerbated by supply chain constraints.

“I think this theme of persistent transient inflation will manifest itself at different times in various geographies, so while the pressure may ease in one region, it may increase in another. It is therefore important to continue to monitor conditions and adapt to them as they change, ”explains Husain.

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