Like the Reserve Bank, ASIC is keenly aware that the rise of private markets, and especially private equity, creates both “upside and downside risks” to an efficient and fair economy. But it’s ASIC that sits in the first line of defence, and its new cohort of commissioners are determined to keep this burgeoning market clean.
Alternative fund manager Alceon and advice group Findex reflect on the genesis of Alceon’s Australian Property Fund, and why a finite number of key partnerships is better than mass market capital.
US, Euro inflation to drop sharply in 2022
Inflation has remained in the headlines through February and will likely continue to do so throughout the remainder of the year. Yet whilst the headlines suggest both inflation and interest rates are heading higher in a straight line, the real world impact is far more nuanced and uncertain.
This was the central focus of a recent white paper published by global fixed income specialist Western Asset, and authored by Portfolio Manager Richard A. Booth. Titled the Global Inflation Update the paper seeks to highlight the differences in ‘recent inflationary impulses’ and expectations for both inflation and bond yields in the US, Europe and the UK.
Admitting that US inflation has run ‘much higher’ than neither Western or the Federal Reserve predicted, the causes for the spike are well appreciated by now. That being a 50 per cent increase in energy prices, the switch in demand for goods rather than services and resultant bottlenecks in production and supply chains.
Commenting on the latter, Booth expands on the supply chain issue saying “this sudden increase in goods demand put a strain on production and delivery systems already impacted by the pandemic. Prices surged across goods that had seen little inflation, and even deflation, for the past two decades”.
The so-called ‘poster child’ of bottleneck pricing remains the used car sector, with prices remaining ‘persistently’ higher for lack of a better term. But this has been exacerbated by both globally constrained production that has yet to fully recover and the ‘migration from cities to suburbs’ amid the pandemic resulting in unexpected demand for cars.
One of the less expected influences on inflation was the cost of shelter, which Western Asset expected to remain around 5 per cent for at least the first half of 2022. This will be a key driver of core inflation of the same period. But despite the short-term difficulty, Booth says “we are starting to see signs of slowing in terms of increases in rents, prices and house-buying activity”.
Ultimately, the result is that they now see “inflation dropping sharply into the latter half of the year” in the US.
Moving to Europe, Booth suggests that inflation has ‘likely peaked’ but that the next quarter risks will remain high that it doesn’t fall as much as expected due to a blow out in the ‘energy services sector’ which combines electricity and heating costs. This is a direct result of falling stockpiles of natural gas and growing geopolitical issues in Russia.
The UK is where inflation becomes the most interesting, with the economy facing many of the same dynamics as the US and Eurozone, but with the added and underappreciated impact of Brexit. The end of the ‘transition period’ occurred in 2020, which has hard far-reaching impacts on the labour market. Booth highlights the an example of a ‘European National’ working in the UK as an explanation to the issues they are facing today.
“European national that had moved to the UK in recent years, worked in hospitality and lived in rented accommodation—if pandemic rules meant that their job was lost or furloughed and there were heavy restrictions on any social interactions, returning to live with family in their home country would likely be an appealing option”.
Whilst in theory this makes sense, the impact on employment is one faced by many countries around the world. The pool of available workers has been significantly reduced and potentially for an extended period of time with “Post-Brexit visa rules make it much more difficult for EU nationals to work in the UK and employers have reported significant difficulties in hiring” according to Booth.
The result is that the Bank of England’s move to become the first G7 central bank to hike rates may well be the first of many given the very real threat of ‘long-term inflation expectations becoming engrained’. “Given the backdrop described, we expect the BoE’s concern over higher inflation becoming entrenched to persist, which should lead to further policy-rate normalization and an underperformance of nominal and inflation-linked gilt yields” Booth concludes.
