Show notes

The Investment Intelligence Podcast: Is inflation really here to stay?

Host: J.P. Vicente, Head of US Marketing & Client Engagement at Allianz Global Investors
Featured guest: Ann-Katrin Petersen, Investment Strategist at Allianz Global Investors

Notes, quotes and references:

J.P. and Ann-Katrin discuss the outlook for inflation, interest rates and economic growth as the global economy tries to shake off the lingering effects COVID-19 pandemic. They also talk about the implications for portfolios.

Some key thoughts and topics from this episode:

Is the latest uptick in inflation transitory or the start of a secular upward trend?

“The jury is still out … but there are certain cyclical factors—above all structural factors—at work that could lead to a more persistent rise in the price of goods and services … But, medium-term inflation risks are clearly skewed to the upside, so … we shouldn't be surprised if inflation surprises markets in the medium term.”

Can you quantify your inflation expectations?

“I wouldn't expect return to the inflationary environment of the 1970s. However, we will probably more often live in a world where inflation will overshoot, or exceed, central banks' targets, which hover around 2% in most cases. So, it could well be the case that inflation will be above 2% for longer than markets currently expect.”

What are the potential impacts of declining global trade and rising protectionism?

“Repeated disruptions in the supply chain will become more likely … and logically not only relative prices are changing, but also aggregate price levels. Overall, I believe that uncertainty about the inflation outlook will increase and inflation volatility will also likely pick up. In a nutshell, this broader-based trend towards deglobalization will weigh on … global economic growth and … will also bring the risk of structurally higher consumer price inflation.”

Is stagflation a possibility?

“We don't see a stagflationary environment popping up any time soon. But what could be a scenario over the medium term is slower trend growth than in the past … weighed down by unfavorable demographics on the one hand, and possibly lower productivity on the other hand, potentially coupled with an environment of medium-term higher inflationary risks. But this would not be a stagflationary environment in the classic sense. Let's also not forget that in the near term … we are still expecting the strongest global growth in the past four decades in 2021. And growth prospects for 2022 remain very favorable as well.”

What are the implications for portfolios?

“The macroeconomic backdrop remains constructive for risky asset classes, such as equities, given still robust growth prospects on the one hand, and more divergent, but still supportive, economic policy on the other hand. What investors should prepare for in the near term is more market volatility over the coming months, as some tailwinds are likely to fade. So, in terms of asset allocation, we are advising a moderate overweight of equities versus bonds.”

The full episode has even more details on the topics above. Check it out.

You can find our firm’s piece of how investors might reposition portfolios in an age where interest rates could stay lower for longer here and a commentary on a book mentioned in the podcast—The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival, by Charles Goodhart and Manoj Pradhan—here.

Cultural recommendations:

J.P. recommends the new album of Cole Porter classics sung by Tony Bennett and Lady Gaga, Love For Sale. The Guardian praised what is expected to be the last outing for the 95-year-old jazz legend who has been diagnosed with Alzheimer’s disease, as an “ebullient album (that) feels like a fond farewell rather than a solemn goodbye.”

After nearly two years of lockdown and scant travel, Ann-Katrin is looking forward to re-engaging with her adventurous hobby, kitesurfing in such places as the south of Spain, home to Tarifa, one of the most popular and busiest kitesurfing spots in the world.

Creativity and editing: Peter Lennox.
Production: Mark Egan.