The Continental Group, a leading insurance intermediary and financial services provider in the GCC region, recently hosted a webinar titled ‘Can inflation be tamed? Learn from the experts’, where finance specialists demystified inflation and its current and potential impact on businesses, economic sectors, and livelihoods. While the survey respondents wholly agreed that rising inflation will impact their cost of living by at least 10%, over two-thirds said they still view equity markets favourably, denoting the continued uncertainties.
Joseph Graham, CFA, Managing Director & Investment Strategist, Lord Abbett; Atul Penkar, Senior Portfolio Manager, Aditya Birla Sunlife AMC; and Neelam Verma, Vice President & Head of Investments, The Continental Group; were the key speakers at the webinar, which was hosted by Anselm Mendes, Executive Director of Sales, The Continental Group.
The webinar was conducted in light of rising inflation across the globe due to many causal factors, including the uneven post-pandemic recovery, the Russia-Ukraine conflict, and tense geopolitics. The inflation impact is seemingly not lost on the public as evident from the survey findings: 41% of respondents cited inflation as the biggest threat to the global economy this year, followed by rising crude oil prices (30%) and widespread uncertainties (30%). Furthermore, about 38% of respondents said inflation will impact their cost of living by more than 20%.
“The last prominent inflation was in the 70s, the data of which is rather thin and inapplicable to modern-day circumstances. In previous inflationary cycles, the curves were flattened through rate hikes, etc. In today’s case, however, with complex causal factors, the possibility of further steepening cannot be ruled out,” said Joseph Graham. “Directly, people are witnessing it through higher domestic fuel prices. Indirectly, the impact will be felt through a rise in transportation and food costs, etc. The impact is across the board,” added Atul Penkar.
“In GCC, oil production has indeed led to cash surplus, and there are positive signs in local markets. However, because these are importing economies — particularly food imports — inflation is inescapable. And being pegged to the US dollar, they are essentially importing inflation. For investors, the solution hinges on strategic allocation, preferably in consumer staples, healthcare, tech, financials and energy,” said Neelam Verma.
Neelam’s belief was substantiated in the audience poll, with 68% of respondents affirming their confidence in equity/stock markets. Conversely, the fixed income space found support from 21% of the polled. Deconstructing the fixed income market, Joseph Graham said: “Fixed income, especially core portfolios, carry high-rate risks. So, inflation and the naturally accompanying interest rate hikes run counterproductive to fixed income instruments. So, they should be strategically placed in the portfolio. Then there is the credit risk, where it gets murkier for companies.”
Despite noticeable risks of recession, Central banks continue to remain hawkish. Apprehensions over aggressive interest rate hikes by Central Banks are now abating due to their potential impact on inducing a recession. Delving further afield, Graham said that yield curves are not the best indicators of recession probabilities. “The recession, if at all, is unlikely to cause widespread job losses or credit defaults. It’ll be more like a victimless crime.”
Atul said that economies with higher debt-to-GDP ratios will be more susceptible to commodity-price shocks, adding that “governments will increase their investments into sustainable energies, as it is inevitable, but there are practical roadblocks in the near-to-medium term.”
“The Central Banks have a tough choice between excessive inflation or inducing recession. For the stocks and bond markets, this means that a greater part of the decline has already taken place and that a new rally phase could commence before long. A far greater decline would also be risky from the perspective of Central Banks as many assets serve as collaterals for the loan,” explained Neelam Verma. Responding to questions from investors in attendance, Neelam emphasised caution before exploring portfolio changes for short-term gains from commodities such as energy.
“As we’ve seen, prices can rise rapidly but reversals can happen just as quickly. This is especially true when the cause of the sharp increase is a geopolitical event. This may be a good time to review your portfolio with your financial advisor, as your exposures to particular sectors may have changed dramatically, given recent market movements. Though it may sound counterintuitive, rebalancing your portfolio by selling recent winners — such as energy companies — and buying sectors that have declined may allow you to lock in some gains while ensuring you’re not overexposed to the risk of a commodity price reversal. An advisor can help you determine the best course of action,” Neelam added.