There are plenty of reasons to believe the approach by central banks to stimulate economies will kickstart inflation, but there is still no concrete evidence it has worked and investors should leave the door open for the possibility that inflation could be more allusive than first thought, Queensland Investment Corporation’s (QIC) deputy state CIO Allison Hill has described.
“Look at all the stimulation central banks have thrown at the economy and we have not achieved inflation to a material degree at all,” Hill said in conversation with Investment Magazine in advance of the upcoming Fiduciary Investors Symposium to be held at the end of April.
While Hill acknowledged there have been moments when bond market reactions have flirted with the concept that inflation is closer than it has been previously, she said she has no reason to expect any immediate confirmation that inflation is on the horizon.
“That does lead people to think that maybe it could be a bit more like Japan in terms of the economic scenarios and outcomes,” she said, before quickly pointing out that demographics is a key difference in that Japan has a skewed older population has had a disinflationary impost while broadly the rest of the world has growing populations that is more inflationary.
It’s based on the lessons learned from previous recoveries that Hill believes central banks are better positioned today to address economic challenges resulting from COVID shutdowns than may have been the case in the past.
“It appears [Central Banks] are very singularly focused on inflation because they’ve seen the downside of taking the foot off the pedal too soon, it does appear that it’s heading the the right direction,” Hill, who works with funds looking for multi-asset exposures backed by state government assets, said.
Despite her validation of the approach to economic stimulus taken by central banks in both locally and in the developed markets overseas, outcomes remain uncertain and the pathway to real economic growth not assured.
“The process we are moving into now seems to be getting stimulus in the hands of households and mums and dads and while this is supposed to lead to real economic growth we also appreciate inflationary effects could be transitory because once its spent the money is gone and there will be people who use it as savings,” Hill described.
Hill pointed to US President Joe Biden’s possible plan to spend on infrastructure, healthcare and education as “likely” to be stimulatory to real economic growth, although she added this is still as yet largely unproven.
Perhaps unsurprisingly Hill and her team’s most vibrant discussion revolves around the group’s bond portfolio and in particular its approach to sovereign bonds.
“If you don’t think inflation is kicking off anytime soon then your opinion should be that interest rates aren’t going anywhere anytime soon so low yields will persist,” she says. QIC has addressed this by taking away sovereign bond allocations and adding to credit and credit segments.
Overall QIC has introduced between 5 and 7.5 per cent in private debt on average into client portfolios as a diversifier of income streams taken primarily from the bond portfolio. Meanwhile the manager has been “leaning in” to its infrastructure allocations past 10 per cent for some clients which Hill describes as a “meaningful” tilt.
In an environment where bond portfolios in some parts of the world are earning negative real returns before currency hedging and with clients looking for CPI plus returns Hill highlighted the attractiveness of real assets with real income streams in the current environment.
Hill will join representatives of NZ Super and Mercer Investments to discuss the how new work/life patterns have impacted long term investment opportunities as societies emerge from lockdown.