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An upbeat week for jobs for the world's economic heavyweight, but where does this leave investments should inflation start to uptick? Landon Tiong, Portfolio Manger, explains.

Our key messages this week are:


Strong labour markets create inflationary pressures

It was another risk-on week for the US, UK and European equity markets. Strong economic momentum helped fuel record highs for the likes of the Dow and S&P 500. Key macro events included news of tighter labour conditions – jobless claims falling again in the US – and Janet Yellen telling US legislators the prospects for the domestic economy remain strong.

In US labour markets news was positive: On the surface, more people found work in January in areas like retail and construction as non-farm payrolls rose to 227,000, beating the consensus of 175,000. Yet another data release found the unemployment rate had ticked up to 4.8% from 4.7% the previous month, however this increase was actually an upward shift in the participation rate. This means more people are returning to seek work, and the strong jobs numbers suggest that this increased slack is being picked up.

 

Rates will be steered on jobs and inflation uptick – Fed chair

Fed Chair Janet Yellen testified to the US Senate Banking Committee last week. She remains upbeat on the strength of the US economy and, through staying with its data dependent strategy, the Fed chief suggested gradual interest rate increases would be appropriate “should employment and inflation move in line with expectations”. Like the Fed, our data points to 2 to 3 rate hikes this year in the US.

We expect the Fed to continue to walk a tight rope between balancing inflationary pressures and normalising the rates dynamic.

 

Investing through inflation

At Coutts, our portfolios are positioned in anticipation of a rising rate and inflationary environment for global markets, but how?

On the rates front, we are underweight interest rate-sensitive gilts and treasuries, while favour less-rate sensitive corporate bonds, as well as alternative strategies which we expect to outperform in a rising rate environment.

Turning to inflation, we continue to like equities which are enjoying nominal earnings growth. Equities have tended to enjoy the highest P/E multiples within the 1-3% inflation range. We still think corporates can pass on rising costs to the consumer, protecting shareholders.

“Real assets” like property and commodities can also help investors hedge out unwanted inflationary risks. In this regard, UK commercial property remains a particularly attractive asset class, from where we stand, and has sound fundamentals and a growing rental income stream.

Overall, we expect a moderate pick-up in inflationary pressures – within a band of 0%-3%. We also see a Fed constructive on monetary policy because of a global economy that is on a firmer footing. In this scenario, a Goldilocks economy, where conditions are neither too hot nor cold, is generally a positive environment for global equity markets.  

We should point out that short-term volatility might be expected in any type of markets environment, especially when political events seem highly interwoven into investment thinking, so things can always change quickly.

Discretionary Portfolio Manager

Landon Tiong

Landon is a Discretionary Portfolio Manager in Coutts Investment Management and Wealth Structuring and is responsible for managing investment portfolios for high net worth private clients.

He started his career working extensively with International and UK RND private clients before moving to the Coutts Investment Office as a portfolio analyst within the Bespoke UHNW space, where he developed a keen understanding of asset allocation, investment selection and portfolio management.

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