Regimes matter
The dual forces of technological efficiency and an ageing demographic profile in the developed world remain powerful deflationary forces, however a combination of further fiscal support/direct stimulus packages, government backed lending to small businesses, a move to on-shoring of production and further meaningful developments in the race to a vaccine could shift inflation expectations meaningfully higher from here.
Investment regimes matter.
The last forty years have been, by and large, dominated by a dis-inflationary environment with reasonable economic growth rates which has favoured the, now conventional, balanced portfolio comprised predominantly of equities and medium/long term bonds.
Many commentators in recent years have heralded the end of the bond bull market which began in 1982. Our dispassionate, evidence based investment approach makes no such prognostications of multi-decade trends. There are, however, some nuances emerging within our indicators that suggest a possible shift in the investment regime from the current dis-inflationary environment. It may appear counter-intuitive that we are seeing some tentative reflationary signals so soon after inflation has collapsed in the developed world, a consequence of pandemic induced shutdowns. The dual forces of technological efficiency and an ageing demographic profile in the developed world remain powerful deflationary forces, however a combination of further fiscal support/direct stimulus packages, government backed lending to small businesses, a move to on-shoring of production and further meaningful developments in the race to a vaccine could shift inflation expectations meaningfully higher from here.
A reflationary environment, understandably, does not favour a long dated stream of fixed nominal returns. Rising inflation expectations are kryptonite to the current value of a long dated conventional bond. Our bond indicators have been deteriorating for the last few months leading to a modest exposure in portfolios. In addition we have witnessed early indications that more reflationary themes may be emerging in our equity market preferences. This year we have implemented overweight positions in Emerging Markets, Europe vs. the US and Real Estate. If reflationary forces continue to build we may well see an end in sight to the spectacular relative out-performance of Growth stocks versus Value which will be a big departure from the last 10 years.
Financial market trends are never linear and one dimensional to anticipate. It is worth considering, however, that the current pandemic may well be the seminal event that triggers the end of a long standing regime of falling inflation, rising bond prices and the superior performance of technology sectors and the US equity markets.