Secular inflation is the new normal — get ready
What is secular inflation?
Secular inflation is a prolonged period of price increases that persist for an extended period.
While the definition is simple, identifying the variables causing it and detecting the early signs of it are not. Except for the variable of natural disasters, secular inflation tends to result from government policy or lack thereof. But since anything secular takes time to formulate and materialize, secular inflation is often not understood, nor is it accepted until afterward when it has become an entrenched, unavoidably apparent, and destructive, destabilizing force. One of the main variables for secular inflation to surface and become engrained is the growth rate in the money supply. Other significant variables include, for example, population growth and composition, working age population, labor mobility, international trade, economic integration, and financial market openness
For nearly forty years, the world has witnessed a general price decline and lower inflation uncertainty driven by many factors, including women entering the workforce, globalization, and increased global economic integration with significant emerging markets, such as India and China joining the World Trade Organization (WTO) in 1995 and 2001, respectively, growing labor mobility, technological advances, and central bank inflation targeting frameworks.
There has been a substantial change to all the variables, with many moving in the opposite direction of what we experienced for many decades. In addition, while there will likely be continued price benefits stemming from technological change and innovation, the subsequent phases of such change will take place in a radically different geopolitical and labor market backdrop. While the first few phases of technological change as the world began, the march towards a digital economy took place in an increasingly open world with growing open or free trade; the next phase will take place in a world rapidly moving from the world wide web to regionalization of cyberspace. To expect deflationary forces stemming from automation and robotics to continue misses this point. We expect higher competition for a limited qualified workforce possessing skills needed for the successive waves of technological disruption and change, which will come from the confluence of wider dissemination and use of supercomputing, connectivity, and mobility.
If you are as convinced as we are, investment portfolios can be engineered to better weather such an inflation climate and profit from it. Allocation to beneficiaries of inflation, a theme we introduced in Q3 of 2021, remains appropriate.
There are pockets of opportunity across each asset class in a secular inflationary environment where persistent upward price pressures emanate from a broad section of the global economy. The focus should be on high-quality regions, stocks, and bonds. Regarding regions and countries, we prefer countries with strong and improving fiscal and external account positions. Net commodity exporters will likely be long-term beneficiaries. Thus, this group of countries is a good begin the country selection process, keeping in mind access and liquidity. While we have a general preference for defensive sectors and value styles, there is a need to have a more nuanced strategy that includes quality assets from across sectors and styles. In the commodities asset class, we continue to favor a slight overweight to gold but also expect that there will be a steady tailwind to support our ARMM investment theme (Agricultural, Renewables, Metals, Minerals).
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