Shine Trader Limited Live reports:
With energy prices soaring because of supply shortages, investors are fretting about the risk of stagflation in the 1970s. But analysts at investment banks such as Morgan Stanley say there is an emotional element to investors’ understanding of stagflation and that the market is mispricing it.
More specifically, Andrew Sheets, Morgan Stanley’s chief cross-asset strategist, said it’s not hard to see why the word “stagflation” seems to come up again and again in conversations with investors.
However, it’s also hard to ignore that this widely cited fear is not clearly defined. If “stagflation” means “the 1970s”, a period of wage-price spirals and high unemployment, that is clearly not the case now. Global unemployment is falling and inflationary pressures will moderate over time rather than spiral.
Moreover, asset pricing is completely different. In the 1970s, nominal interest rates were at record highs and equity valuations were at record lows. Today, YIELDS are near lows and valuations are high.
Andrew Sheets says there are three lessons for investors:
First, recall that “stagflation” was a hot topic in 2004-05.
In 2003, as the economy grew (markets rebounded), purchasing managers’ indices soared. But by mid-2004, as the rate of change in economic growth slowed, the PMI peaked. At the same time, rising energy prices are starting to push up inflation and interest rate markets are pricing in a more hawkish Fed line.
In April 2005, the CPI rose 3.5 per cent year on year, while the US manufacturing PMI fell to 52. Those fears eventually faded as growth rebounded and inflation moderated, but we think 2005 May have provided a useful reference point for a panic far less acute than that of the 1970s. The price-to-earnings ratio has been falling throughout 2004 and 2005, in line with current projections by Morgan Stanley’s US equity strategy team.
Second, inflation is already visible and affecting monetary policy.
In the past month alone, central bank rates have risen by 25 basis points in New Zealand, 25 basis points in Russia, 50 basis points in Peru, 75 basis points in Poland and 100 basis points in Brazil.
Third, while stagflation means different things to different people, past periods of rising inflation and slowing growth have usually had one thing in common: higher energy prices.
Therefore, Morgan Stanley believes that the best cross-asset hedge against stagflation is in the energy sector.
In addition, Jim Reid of Deutsche Bank recently did a monthly survey and agreed with Morgan Stanley on stagflation:
“One of the questions raised by the survey is how we define ‘stagflation. It also shows that perceptions clearly overestimate the risk of stagflation.”
According to deutsche Bank:
43 per cent defined stagflation as “zero or negative growth and inflation well above target”;
30 per cent defined stagflation as “growth below trend and inflation above target”;
Stagflation was defined by 25 per cent as “a strong slowdown in economic growth and a strong pick-up in inflation”.
As Jim Reid notes, the survey shows that about 40% of people think there is a risk that the U.S. economy will grow below trend next year, which is pretty aggressive considering the consensus forecast for 2022 GDP growth is 4%.
Strategists at Deutsche Bundesbank said that if the numbers proved correct, “markets could seriously misjudge the economy”.
Jim Reid concludes that his “gut feeling” is that the term “stagflation” is now being used too aggressively, despite the elevated risks on the inflation front, and he is somewhat in agreement with Morgan Stanley on this point.
Reprint indicated source：Shine Trader Limited Live information