- Access these views via the Dynamic Multi-Asset Fund, a dynamic fund designed to deliver across market environments and help investors navigate the toughest market situations.
From the desk of Geraldine Sundstrom, Friday 9th April 2021.
P is not C
We are in for another corporates earnings season. This one could be of particular interest because expectations are, of course, running high. But beyond the hefty headline earnings growth numbers, it will be far more important to watch the input price pressures, planned price increases, pricing power and margins outlook. Markets have been quick in pricing the recovery but increasing bottlenecks, shortages and input price increases could be starting to impact bottom-lines in a meaningful way, for better or worse. Indeed, as time goes by, some shortages that were at first dismissed as transitory keep worsening, extending and in some cases, like the semiconductors industry, are finally being recognised as structural and fundamental.
At a more macro level, the past few weeks have seen a growing focus on the Price Paid sub-component of PMI indices as well Purchasing Price indices. The March Chinese PPI printed at +4.4% year-on-year (YoY) vs. the +3.6% YoY expected and the U.S. saw a +4.2% YoY increase vs. an expectation of +3.8% YoY. Of course, some base effects are at work but as highlighted in our previous weekly “Inflation harvesting”, some upstream price pressures are colossal even compared with December 2019 levels. The areas of inflation and bottlenecks are also very specific and usually linked to the thematic of the Green and Digital recovery.
However, we think the ramifications for monetary policy in terms of the impact on CPI are very unclear. In all likelihood, these PPI pressures will be seen in corporate margins expansion or squeeze, and will impact corporate profitability rather than feed into final prices and the CPI. This crucial distinction seems to be somewhat missed by markets that seem to lack the corporate discrimination filter and over-read into CPI and monetary policy. We continue to position to benefit from the PPI pressures in these Green and Digital secular enablers with barriers to entry and pricing power.
In DMAF portfolios, we took advantage of the strong increase in the breakeven inflation rate towards 2.35% in the 10-year point to quasi-exit our long-held U.S. inflation-protected bond position. We have recycled it into nominal fixed income with a tilt towards Australian duration, but also raised our overall duration to 1.7 years from a low of about 1.25 years. In equities, we have further tilted the exposure to go up in the supply chains and, in particular, we decided to exit the electric vehicle (EV) manufacturers in light of exploding competitive pressures, shortages and a dramatic increase in input prices. We have also tweaked our cyclicality 2.0 thematic to better reflect the contours of the new US$2.25 trillion Biden Infrastructure proposal. Finally, we diverted some equity exposure away from the U.S., in light of the brewing 2022 corporate tax increases, towards Asia and Europe. Overall equity exposure is around 30%.
How can DMAF benefit investors in today’s uncertain markets?
i. Provide optionality
ii. Enhance returns
iii. Control risk
View the fund