The market is left uncertain as to whether we are through the eye of the needle or through a period of calm that portends more difficult time ahead. Inflation still seems on the rise in advanced economies with pipeline pressure from corporates and some evidence of second round effect as higher inflation leads to pressure for higher wages. Neither the sticky nor transitory thesis is disproved, all we have is a period of calm as equity markets find some stability. The question is whether we will break out of the range and in which direction.
A pipeline of inflation
The picture on the pipeline of inflation is a difficult one. US producer price inflation (PPI) is as high as 10.7% and that may be under-estimating the problem as social measures are taken. Similarly, PPI pressures remain elevated in many countries as they have opened up again, but many workers tend to still work from home and are spending their money on new homes or furnishing their apartments/houses. In the meantime, virtual education opens the window for competition for tablets among children. Supply disruptions continue to ripple through the systems as some factories that had to close are having difficulty playing catch-up. The entire supply chain system creaks and groans. Add to this the misery of rising energy prices from oil to natural gas and it creates a potent inflationary mixture. Indeed, it will take years for the supply of natural gas and LNG tankers to grow while the demand is high now. Similarly, microchip factories need enormous investments that take a long time to build. Finally, experienced truckers are missing probably given the difficult working conditions and poor benefits.
Tightness of the labor market
The job market in the United States and Europe is steadily improving and there are signs of second round effects. The question is whether surging inflation and declining savings will eventually hurt consumption. Although sentiment is suffering, consumption continues at a decent pace with evidence of substitution. Over time though, as savings decline, the odds are that consumption will also start to decline. This is particularly the case for workers in mature sectors. They may benefit from a cyclical rebound but corporates will likely find it increasingly difficult to pass on rising costs. In contrast, in growth sectors, rising wages driven by rising demand are likely to benefit workers. The question is whether productivity rises sufficiently to offset rising costs. Investors in particular are likely to become increasingly demanding as they favor stable large earnings – namely the so-called Quality Style.
What does it mean?
In such an environment, short-dated European credit solutions which protect against the risk of rising yields and deploy leverage are of interest. There is also the point to consider as to how to position for the unthinkable. In a crisis, most assets flow to currencies, leading to large movements. In such an environment, counter-cyclical currency strategies embedded in multi-asset strategies offer opportunities.
Nordea Asset Management is the functional name of the asset management business conducted by the legal entities Nordea Investment Funds S.A. and Nordea Investment Management AB (“the Legal Entities”) and their branches and subsidiaries. This document is advertising material and is intended to provide the reader with information on Nordea’s specific capabilities. This document (or any views or opinions expressed in this document) does not amount to an investment advice nor does it constitute a recommendation to invest in any financial product, investment structure or instrument, to enter into or unwind any transaction or to participate in any particular trading strategy. This document is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instruments or to participate to any such trading strategy. Any such offering may be made only by an Offering Memorandum, or any similar contractual arrangement. Consequently, the information contained herein will be superseded in its entirety by such Offering Memorandum or contractual arrangement in its final form. Any investment decision should therefore only be based on the final legal documentation, without limitation and if applicable, Offering Memorandum, contractual arrangement, any relevant prospectus and the latest Key Investor Information Document (where applicable) relating to the investment. The appropriateness of an investment or strategy will depend on an investor’s full circumstances and objectives. Nordea Investment Management AB recommends that investors independently evaluate particular investments and strategies as well as encourages investors to seek the advice of independent financial advisors when deemed relevant by the investor. Any products, securities, instruments or strategies discussed in this document may not be suitable for all investors. This document contains information which has been taken from a number of sources. While the information herein is considered to be correct, no representation or warranty can be given on the ultimate accuracy or completeness of such information and investors may use further sources to form a well-informed investment decision. Prospective investors or counterparties should discuss with their professional tax, legal, accounting and other adviser(s) with regards to the potential effect of any investment that they may enter into, including the possible risks and benefits of such investment. Prospective investors or counterparties should also fully understand the potential investment and ascertain that they have made an independent assessment of the appropriateness of such potential investment, based solely on their own intentions and ambitions. Investments in derivative and foreign exchange related transactions may be subject to significant fluctuations which may affect the value of an investment. Investments in Emerging Markets involve a higher element of risk. The value of the investment can greatly fluctuate and cannot be ensured. Investments in equity and debt instruments issued by banks could bear the risk of being subject to the bail-in mechanism (meaning that equity and debt instruments could be written down in order to ensure that most unsecured creditors of an institution bear appropriate losses) as foreseen in EU Directive 2014/59/EU. Nordea Asset Management has decided to bear the cost for research, i.e. such cost is covered by existing fee arrangements (Management-/Administration-Fee). Published and created by the Legal Entities adherent to Nordea Asset Management. The Legal Entities are licensed and supervised by the Financial Supervisory Authority in Sweden and Luxembourg respectively. A summary of investor rights is available in English through the following link: https://www.nordea.lu/documents/engagement-policy/EP_eng_INT.pdf/. The Legal Entities’ branches and subsidiaries are licensed as well as regulated by their local financial supervisory authority in their respective country of domiciliation. Source (unless otherwise stated): Nordea Investment Funds S.A. Unless otherwise stated, all views expressed are those of the Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches and subsidiaries. This document may not be reproduced or circulated without prior permission. Reference to companies or other investments mentioned within this document should not be construed as a recommendation to the investor to buy or sell the same but is included for the purpose of illustration. The level of tax benefits and liabilities will depend on individual circumstances and may be subject to change in the future. © The Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches and/or subsidiaries.