Fidelity International

Look through transitory inflation and towards earnings

09 June 2021

9 June 2021

By Romain Boscher

Romain Boscher, Global CIO of Equities, reflete sobre a inflação e como esta é provavelmente transitória, acrescentando que o importante é focar no crescimento dos lucros vs. os níveis pré-pandemia, uma vez que estes podem crescer em cerca de 15% por comparação a 2019:

A closely watched measure of US inflation jumped in April, beating consensus estimates and posting the highest reading for over a quarter of a century. The core personal consumption expenditure index rose 3.1% year-on-year, a significant increase on March’s 1.9% figure. While this feeds into popular fears around higher yields and the knock-on effects in equity markets, the reading is most likely transitory with a contained impact on interest rates. For equity markets, a better guide is earnings comparisons with pre-pandemic levels. This tells us that the profit outlook is very favourable this year and cyclical stocks are well positioned. Beyond that we could see demographics and higher taxes slow progress.

'Champagne bottle pop' of inflation is most likely transitory

The US Federal Reserve’s preferred inflation measure - core personal consumption expenditure - rose 3.1% year-on-year for the month of April; this is a substantial increase on March’s 1.9% figure, well above the Fed’s 2% target rate and the highest reading since 1992.

The spike in inflation has been driven by businesses reopening and a surge in consumer activity while disruptions to supply chains as a result of the pandemic are ongoing. On the ground, our analysts have started to note cost increases across most regions and sectors. At the moment, these appear limited in time and space with the United States and China under more pressure than the rest of the world.

This ‘champagne bottle’ effect of a pop in inflation as we exit from lockdowns is most likely transitory given that supply issues are showing signs of gradually resolving, employment support policies will lapse through the year helping the labour market find a more natural equilibrium and the strength of the housing market seen in many inflation calculations forms a relatively smaller component of core PCE.

Only a self-reinforcing rise in prices underpinned by an increase in costs, especially wages, perpetuates inflation. The core PCE reading also has had little effect on yields, which are still very low and negative in real terms.

Spike in inflation but real yields negative

However, while the current inflation trends appear to be transitory this is not to say that they may not become more persistent later. It is also enough to justify some caution of securities that derive much of their valuation from earnings far into the future given their sensitivity to inflation expectations. Companies with pricing power, able to withstand rising costs and sustain their margins will provide added protection to portfolios. This means that the profit outlook at a granular level is crucial.

A favourable profit outlook this year

Over the past year, we have increased our exposure to cyclical stocks, particularly in technology and industrials, due to high expected growth in profits in 2021. But rather than compare earnings forecasts with last year where base effects are extremely flattering given the shutdown of economies, we have used 2019 numbers. Globally, we expect earnings growth to be around 15% higher than 2019, with Asia responsible for the biggest share and Europe only marginally up.

Significant public spending supports growth prospects on a global scale with investment diffusing across sectors and geographies. With that in mind, even within growth sectors we prefer cyclical components. One exception in banks where we remain cautious about the upside potential particularly if inflation is transitory and real yields remain negative.

Overall, consumer strength, fiscal stimulus and accommodative monetary policy remain key pillars of support in developed markets. But the celebratory mood amid the uncorking of the champagne bottle as we emerge from the crisis will subside. It is then that demographic pressures and higher tax burdens will come back into view and act as brakes on earnings growth and the economy. Excessive levels of debt will also be a source of volatility. For those reasons investors may be better served by being more cautious in the medium and longer terms than they are in the shorter term.

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