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Investors be prepared for biggest inflation scare since 1980s, warns Wood

By Saima Siddiqui 
Updated Date
Investors be prepared for biggest inflation scare since 1980s, warns Wood

New Delhi: The global head of equity strategy at Jefferies, Christopher Wood, in his weekly note to global investors, ‘GREED & fear’ warned all the market players to be prepared for the biggest inflation scare since the 1980s.

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“For now investors should be prepared for the biggest inflation scare since the early 1980s, and wait to see how the (US) Fed reacts. In the meantime, Treasury bonds are likely to sell off more, and cyclical stocks rally more, before any such tapering scare,” Wood said.

Wood believes that if inflation does return on a longer term basis, it would mean that equities and bonds would become positively correlated on the downside, which means they will both go down in price together.

Inflation fear has returned with the rise in commodity prices, especially oil, which has jumped over 90 per cent from its March 13 level of $35 a barrel (bbl.) to around $70/bbl. Prices of other main commodities, such as copper, are going insanely high, while food prices have also been on an uptrend since the last few months.

Watching the recent developments, Investors are acting accordingly. Over the past few weeks, a rise in bond yields, especially in the US, had created a flutter in global equity markets on fears of a possible rise in inflation triggered by President Joe Biden’s $1.9 trillion stimulus package, who signed the stimulus bill, named the American Rescue Plan, into law on Thursday.

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This new the American Rescue Plan package provides $400 billion for $1,400 direct payments to most Americans, $350 billion in aid to state and local governments, an expansion of the child tax credit and increased funding for COVID-19 vaccine distribution.

Furthermore, Wood’s view on possible inflation was also backed up by an analysts at Nomura,who expect inflationary pressures to tighten their grip going ahead. The pickup in recent months, is believed to be primarily due to higher oil prices.

The consensus, as per the analysts, is still under-estimating inflation and will revise their projections higher going ahead. “We see four key factors that are likely to push up the headline inflation rate: base effects, government policies, commodity-push and demand-pull. While inflation is likely to be more supply-side driven initially, we believe reopening is likely to add to demand-side inflation pressures as the year progresses,” wrote Sonal Varma, managing director and chief India economist at Nomura in her March 5 report co-authored with Rebecca Wang.

Among Asia countries like Korea, Thailand and Singapore have been struggling to even get to 2 per cent inflation. “However, expectations are higher in EM Asia (India, Indonesia, the Philippines) and, if they tolerate higher inflation, then medium-term risks could rise,” Varma and Wang wrote in their report.

However, analysts at BofA Securities, see a silver lining for inflation in India. According to them, barring sporadic food led inflation spikes, India’s inflation trajectory is headed lower in fiscal 2021-22 (FY22) and is expected to average at 4.6 per cent down from 6.2 per cent in FY21 as fundamental factors of inflation remain weak.

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“We expect the RBI to keep the operative inflation limit in their revised framework at 6 per cent combined CPI inflation. The recent RBI’s currency and finance report suggests the same,” wrote India economist Indranil Sen Gupta of BofA Securities, in a co-authored note with Aastha Gudwani.

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