Alberto Matellan, the Chief Economist at MAPFRE, shares some insight on what US inflation means for stock markets and investors.
Inflation in the USA has reached its highest levels since 1990. Figures like these could cause a mass selling reaction in the Stock Market, a phenomenon known as a “sell-off.
Prices are going to continue to rise during the next few months, but what is more important than the actual figures, is the ability to analyse the reasons behind this inflation, and how long it will last.
Right now, analysts and the central banks are telling us that this high inflation will not last very long. If that turns out to be true, the problems will not be too large.
However, the dynamics of inflation will vary depending on the region, and if there is any place where inflation could become more permanent, the United States is that place, and this could end up affecting the monetary policy pursued by the Feds. Even so, I think it is still too early to decide whether that scenario will actually occur.
I recommend that investors should not feel overly tempted to make changes to their portfolios just because of the noise generated by the inflation we are now seeing. As professionals, we go for months without changing (the portfolio), and retail investors should wait until the beginning of the upcoming year, when we will have a clearer view of the situation and a new financial year ahead of us. That is the time when they should have another talk with their advisor about the possibility of changing their objectives.
This is because the components that are driving increased inflation, such as prices for petroleum, natural gas, and CO2 emission allowances, are extremely volatile, and we should not use elements like these as the basis for making decisions on investment or monetary policy. We need to wait until the beginning of the year, when I think the scenario will have become much clearer.
While most of the current debate has been focused on inflation, during the last few months growth has also become weaker. One clear example of this is China, where I see an interesting situation:
China’s government has a firm grip on the country’s economic circumstances, and this is very different from what happens in the United States or Europe. During recent months, it has been applying the brakes because it prefers growth that is more solid and stable, but that braking action has affected some of the industries with the most debt, such as real estate. However, in the case of Evergrande, for example, the government found a solution very quickly, because it also has the tools it needs to control situations that have become very urgent. Europe is now the region suffering the most from this economic deceleration in China, and this is something we need to take into account as investors.