The second quarter of this year was a positive one again for investors, having looked as though the cycle might turn back towards value stocks, it was the US tech giants that again outperformed. With US and UK central banks making continued dovish noises about interest rates, markets are feeling good but grappling with what the post-pandemic economy is going to look like.

The US have gained bipartisan agreement on the first $1b of green infrastructure spending and the EU have launched a Euros750M NextGen fund to tackle some of the same issues. Markets are trying to work out if companies will continue to benefit from this central government spending or have to pay for it. Governments aren’t going to want to keep funding things for ever and have already stated that tax on corporations will have to repay some of this largesse.

Our focus at the moment for investors is whether inflation is likely to rise in the future, if so how it will impact them and how this can be mitigated. We have said for a long-time that inflation is set to rise at some point, as governments have been printing money for years now. In fact this has led to asset price inflation, rather than the more traditional price inflation. Wages, which often act as a fuel source for price inflation, have been held low for a whole range of structural reasons that we have explored before. Most central banks seem to be relaxed about inflation beyond the ‘transitory’ inflation to come in 2021 (rising from the low price base of 2020), with the odd exception such as outgoing MPC member Andy Haldane.

Inflation may come from the economic transition phase that we describe above, from postpandemic demand conflicting with post-pandemic supply and with the newly minted and freely flowing global cash supply. In the longer-term equities are the best inflationary hedge but bonds are needed as the investor’s comfort blanket. The issue with bonds is that there are huge inflationary risks with long duration bonds trading at current values.

We will return to this subject in future posts.