Inflation Strikes Again. These Investors Are Looking Past It.

(Bloomberg) -- The specter of inflation is driving some investors out of pricier parts of the stock market, yet many fund managers remain confident that this is merely a bump in the road and equities can overcome the turbulence.

Tuesday’s drop is now the third time since mid-April that the Stoxx Europe 600 Index has fallen more than 1.4% in a day, as market players fret over price increases and the prospect of higher interest rates that could dent the appeal of technology and growth stocks. In each of the two previous dips, investors quickly stepped in to buy, betting the economic boom would continue fueling the bull run in equities.

“The end of the bull market will come with the next recession,” said Martin Moeller, co-head of Swiss and global equities at Union Bancaire Privee in Geneva. “I think we are still quite some time away from that.”

With stocks near all-time highs, nobody would be surprised to see this correction go a bit longer and deeper. The rationale behind the ongoing optimism is that inflation might only peak for a brief period and that the jump is due to technical reasons following the unusual events of the Covid-19 lockdowns. In this view, there’s no fundamental change to the longer-term outlook of subdued wages and prices.

“If we are right with our assumption that the inflation numbers will peak soon, we should not be too worried,” said Moeller. “There may be some spectacular anecdotes about expensive flight tickets, restaurant menus, etc., but this is all noise that will go away, when the supply reacts again.”

The bearish take is that inflationary pressures could be worsened by a labor shortage in the U.S., and that the stock market is already so highly valued that there’s no room for error.

For now, though, bulls are sticking with the view that a market decline that lasts longer than just one or two days might be healthy, giving investors a cheaper entry point and the time to digest upcoming inflation data.

Here’s what other investors have to say on inflation prospects:

Jean Boivin, head, BlackRock Investment Institute

“Markets are pricing in a liftoff from near-zero policy rates as early as next year, even though the Fed through its new framework has committed to stay behind the curve on inflation. We caution against extrapolating too much from strong near-term activity data amid a powerful restart. We see a high bar for the Fed to change its policy stance and believe this may be underappreciated by markets.”

Oliver Scharping, portfolio manager, Bantleon

“There is some real pain under the surface currently, but the backdrop for equity risk assets remains actually very good. Our way to cope is being overweight in equity alternatives such as merger arbitrage and CTAs and focus on idiosyncratic ideas rather than broader sectors.”

Stuart Clark, portfolio manager, Quilter Investors

“While markets continue to fret about the looming spike in inflation, they are forgetting to look through the noisy data and better understand the drivers of this inflation. Inflation was always going to jump on a year-on-year basis given the situation we found ourselves in last year, as well as the deflationary environment we have experienced over the last decade. But given how markets have responded, they appear worried about this inflation sticking around for some time and forcing central banks to respond sooner than they would like with rate rises.”

Patrick Linden, managing director for Germany, Clartan Associes

“Some see the recent stock market dynamics as overheating with little room for more gains from the current levels or even expect a short-term correction, which is plausible. Good stock picks based on both the intrinsic company quality and valuation is more important than ever. With this in mind, we are still fully invested in equities with a mixed positioning between growth and value.”

Uwe Maderer, head of fixed income, LBBW Asset and Wealth Management

“We see U.S. inflation likely accelerating further, around 4% year over year in May, and will remain stronger than 3% until early 2022 if the oil price tracks its future curve. This all will add to the discussion that the disinflationary period for three decades is over and put pressure on central banks to counteract this trend. I do think a stagflationary period from 2022 onwards looks quite likely with PMIs peaking, the rise in input costs will slow the recovery and the transition to green energy will also limit potential growth going forward.”

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