Everyone can relax, inflation is basically over. That has been the message this week from experts keen to keep the good times rolling in 2023.
So far this year we have had an ‘everything rally’ with almost every asset class making strong gains. Even European stocks are up, much to the surprise of JP Morgan's Gareth Witcomb, who told Trustnet he had been cautiously adding to the region, but had not expected to see the gains made so far (the MSCI Europe Excluding UK index is up around 9% year-to-date).
Earlier this week, Bank of England governor Andrew Bailey told MPs at the Treasury Committee that “powerful downward forces” were acting on inflation and that the central bank had “turned the corner”, with price rises expected to end the year below 5%.
Evan Brown, head of multi-asset strategy at UBS Asset Management, said the deceleration of inflation so far this year, particularly in the US, had given investors “more confidence that central banks’ tightening campaigns are winding down”.
This explains why unprofitable, early-stage growth stocks and long-dated government bonds have been among the biggest gainers this year.
However, he noted that “evidence of a reacceleration in economic activity” will be more important for any potential recovery later in 2023.
Analysts at Stifel were quick to agree, releasing a research note on what to buy if inflation does indeed fall more quickly than what the market is pricing in.
The authors – Iain Scouller, William Crighton and Sachin Saggar – said we have already passed peak inflation in the UK and US and that inflation may fall more quickly due to price declines, money supply falls, a higher comparison base and a weakening US dollar, which dampens commodity prices.
With this in mind, they highlighted several areas that should do well and others that should do poorly. On the up should be small- and mid-caps, given the prominence of growth stocks in the asset class, as well as private equity, where a re-rating of listed comparable companies used in multiple valuations could mean the sector rallies strongly. Growth capital and biotechnology trusts should do well for similar reasons.
Debt trusts would bounce back if yields fell on the back of an end to interest rate hikes, as would royalty portfolios, where some trusts have moved to significant discounts.
On the way down will be the booming commodity trade, with falling prices likely to curb investor enthusiasm somewhat.
Infrastructure and renewable energy trusts that have soared over the past year as investors hunt for yield would not enjoy the exceptional gains made previously, but cautious positioning from most managers means that the impact may not be as negative as feared.
However, it is worth remembering that nothing is certain. Although inflation may be coming down, Witcomb said it is “hard to see us on a major two-year bull run” given the current market conditions, even though markets could be buoyed for the next few months on better-than-expected data.