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Inflation To Stay Elevated; Stick With Stocks, "Real Assets" - Credit Suisse

Tom Burroughes

24 November 2021

The rise in inflation seen during recent months is unlikely to be transitory and governments will use it to deflate the real value of heavy debts incurred before and during the COVID-19 crisis. In that scenario, investors should focus on equities and real assets such as property and be wary of government debt, explained in its outlook for next year.

2022 should see a continuation of the shift towards recovery, the Swiss bank said, predicting that the global economy will grow by 4.3 per cent. Although several central banks have started to withdraw pandemic stimulus, interest rates are set to remain at or near zero in the major developed economies. Against this backdrop, equity returns should remain attractive, although they are likely to be more moderate than last year, it said.

A central question is whether inflationary pressure is a temporary problem or likely to turn into a stickier issue, particularly if labour markets are tight and price pressures fuel wage and salary demands. The question of what is the most suitable asset allocation mix for wealth management clients to adopt, hinges on the outcome of that debate. Low yields on listed equities and bonds have helped fuel enthusiasm for less liquid asset classes such as private equity and venture capital. 

Investors shouldn’t suppose that inflation will be a temporary matter, Michael Strobaek, global chief investment officer, head of investment solutions and products, told journalists this week in a conference call. 

There is a transition to a more normal interest rate environment from the ultra-low levels that rates have been at for the past decade, and the multi-decade era of “the great moderation,” when globalisation, macro-economic policy and technology conspired to keep inflation pressures low, Strobaek said. 

Another force that is likely is expanding government intervention in the economy – another pushback against forms of globalisation, he said. 

Recent central bank stimulus measures amid the pandemic have buoyed financial markets, but it is not normal to expect this to be repeated, Strobaek said. 

Even so, the outlook for equities and real assets in general is positive because there is a limited supply of these, contrasting with unlimited amounts of government debt, he said. “We advise clients to stay long of real estate and equities.” 

With exceptions, the outlook for the fixed income market, particularly in government debt, is going to be more volatile, Strobaek added.

In its report, Credit Suisse said this of inflation: “We estimate that global inflation rates – being a measure of the change in prices – increased by 3.5 per cent in 2021. The rate of change in price levels should start to peak going forward. This is because much of the initial recovery in prices is now behind us (i.e. base effects are fading), while there should be fewer supply chain disruptions ahead.

“However, other factors will likely prevent inflation rates from falling all the way back to pre-pandemic levels. One of these factors is the tightness of labour markets. The economic recovery in 2021 helped to bring back many jobs, and unemployment rates in many countries are close to levels prior to the pandemic.

“With the expected recovery in the services economy in 2022, we think the labour market could quickly become tight with demographics exacerbating the issue in many countries. In fact, we already see labour shortages in everything from bus and truck drivers to substitute teachers and restaurant workers. Tight labour markets should improve the bargaining power of workers in wage negotiations. Consequently, while we expect inflation to decline as the year 2022 progresses, this should ensure that the annual average rate of inflation stays elevated at 3.7 per cent. In 2019, global inflation stood at 2.5 per cent,” it said. 

Credit Suisse said that it expects high single-digit equity returns in 2022 compared with double-digit returns in 2021. Other tailwinds for this asset class going forward include the ongoing economic recovery, and the “there is no alternative” argument for equities.

On currencies, the bank said that those which will be favoured are those that can benefit from their central banks’ gradual move towards normalisation. For example, it predicted that the US dollar could strengthen against the Swiss franc and Japanese yen, while the Canadian dollar, New Zealand dollar and Norwegian kronor could be supported. The euro will be under pressure in the earlier months of 2022, it said.