After a first quarter in which signs of an economic rebound pushed equity markets higher, investors will be switching focus to the risk of inflation, CIBC’s chief investment strategist says.
“That means that the more cyclical part of the market is going to be outperforming the more interest-rate sensitive part of the market,” said Luc de la Durantaye, chief investment strategist and chief investment officer with CIBC Asset Management.
Investors should look for a continuation of the rotation from growth to value that’s been taking place since vaccines were first approved in November, he said. “People have been growth-oriented in their portfolio for quite a long time, so that has started to shift — and that’s going to continue to shift.”
The change has strategy implications for the next six to 18 months, he added.
Central banks have made it clear they’ll be waiting to see inflation exceed their targets before raising interest rates, rather than anticipating higher inflation as they did in 2018, de la Durantaye said.
“This means that good economic news will be priced in to the longer end of the curve,” he said, leading to a steeper yield curve. “That has a number of repercussions for the rest of the financial markets.”
There’s been no shortage of good economic news, even with new pandemic lockdowns and concerns about certain vaccines. Earlier this month, the International Monetary Fund forecast the global economy would expand a record 6% this year.
While higher borrowing costs will negatively affect growth companies, financials will benefit and commodity prices should remain firm. “We would recommend being exposed to those sectors,” de la Durantaye said.
Costs for some materials, such as lumber, are already rising, and an employment boom from the pandemic lows a year ago will bring much faster wage growth than what followed the recovery from the 2008-09 financial crisis, he said.
Government debt will also be a factor. With policy options such as higher taxes and reduced services “politically unacceptable,” de la Durantaye said, there will be an incentive for governments to grow their way out of pandemic debt.
“You run the economy hot, you raise inflation so that your nominal debt to GDP starts to normalize,” he said.
“That’s why I think investors are going to grow more and more leery of this strong growth and how passive central banks are likely to be.”
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