The increased threat of inflation in the United States will impact on equity and bond markets, and poses challenges for the outlook for both equity and bond beta, according to a fund manager.
Grant Samuel Funds Management (GSFM) adviser Stephen Miller said the threat of inflation has implications for SMSF investors, who will need to focus less on beta-related strategies, such as through exchange-traded funds (ETF), in their investment portfolios in the future.
“The underlying inflation gauge – a market measure which adds financial market information into the consumer price index to provide a more accurate picture – suggests that there is more inflation to come in the US and there is a very real prospect of inflation noticeably exceeding the Federal Reserve’s ‘soft target’ of 2 per cent,” Miller noted.
“The Fed has recently indicated it is somewhat relaxed about this eventuality, but the extent of that relaxation may still mean four policy rate hikes of 25 basis points each in 2018.”
He added the US budget deficit was expected to be close to 5 per cent of gross domestic product in 2018/19.
Furthermore, with the US at full employment, demand could shift to imports, with resulting higher inflation, he said.
“In the post-2008 environment, one of the consequences of unorthodox monetary policy and following on from the ‘Greenspan put’ was it favoured beta, whether it was equity beta or bond beta,” he told a GSFM market outlook media briefing in Sydney today.
“It was an explicit part of the transmission mechanism … to get bond rates low and thus support equity markets and enable the recovery to gather momentum and hopefully get us back to some form of macroeconomic health.”
He said that task is now largely complete as far as policymakers are concerned, meaning monetary policy is no longer going to support equity and bond beta.
“What SMSF investors like me need to do is they need to be smarter about how they allocate their risk,” he said.
“So what they’ve got to do is look at products that aren’t quite as beta related. Now that might include standard equity funds, which can be long-short so they’re not so beta-sensitive, which are focused on stock picking.”
SMSF investors may need to pay a little bit more and seek the services of a specialist active stock picker and look at less beta-related portfolios, he noted.
He suggested looking at the likes of unconstrained fixed income or less benchmark-aware equity investing and fixed income investing.
“That’s not to say you chuck out your whole ETF portfolio and bring in a whole bunch of active and absolute return-type funds,” he said.
“You tweak your asset allocation, de-weight your exposure to ETF or index-type products, and put them in less beta-sensitive-type products.”
GSFM specialises in marketing funds managed by local and international managers to Australian and New Zealand institutional and Australian retail investors.
It had $5.7 billion in funds under management as at 30 June 2018.
