IMF warns of inflation. Corporation earnings beat expectations

Photo Credit: The Associated Press

The International Monetary Fund is warning of rising threats to the global economic recovery posed by the ongoing coronavirus pandemic and an outbreak of inflation, while urging the Federal Reserve and other central banks to respond quickly if current inflation pressures prove not to be transitory.

The Fed signaled last month that it soon could begin the process of unwinding some of the monetary policy support it put in place in response to last year’s coronavirus-triggered recession. The move would be a first step toward possible interest rate hikes that would slow growth and keep inflation under control.

The stock market has been rocked by a marked elevation of inflation resulting in a rise in Treasury yields and is blamed for the bearish sentiment in September. Shipping delays, rolling blackouts, agriculture hit by natural disasters, and fuel and commodity shortages are raising worries of further spikes in inflation.

Underpinning producer prices, global commodity prices surged in recent months driven by increased demand for coal and metals as economies around the world reopened after being shut due to the COVID-19 pandemic. Labour shortages and transportation bottlenecks have also lifted prices globally

China's September factory's inflation rose to a record on soaring commodity prices, but weak demand capped consumer inflation, forcing policymakers to walk a tight rope between supporting the economy and further stoking producer prices. Rising price pressures come even as Beijing has taken a raft of measures to curb record-high coal prices and ease the country's power crunch, including urging coal miners to boost output and manage electricity demand at industrial plants.

Corporate earnings continue to improve

Stock and bond markets have for weeks been dogged by worries about surging energy prices, jammed-up supply chains and companies failing to pass on higher costs to consumers. Better than expected quarterly earnings reports from Wall Street banks and iPhone chipmaker Taiwan Semiconductor Manufacturing Company, however, have lifted the mood.

The market also expects the higher energy prices and logistic bottlenecks will start to ease once workers are able to travel across states and countries as global travel starts to re-ignite further lifting sentiments.

Portfolio Strategy

The portfolio is down for the month, after a strong run up since October 2020. The general stock market is down by 3% but thanks to the profit taking and portfolio re-balancing exercise before the correction, the portfolio had a nice bond cushion, resulting in a less acute fall.

The question is, what should our strategy as inflation continues to plague the economy.

In general, mild inflation is generally good for the economy and the stock market as a whole than the alternatives. The rise in inflation can be seen as a norm as it is signaling that the pandemic hit economies are starting to recover and the slow down in manufacturing capacity needs to be damped up again, though it will take months to years to re-start all the mines, factories and transports. 

As much as inflation is a concern, it will soon pass as the market forces of supply and demand will adjust themselves to the new norm. The investment narrative right now is still driven by how economies open up in a COVID endemic world.

The place to invest now will be those markets that have accepted COVID as a part of their life and have most of their economic activities back in force, as compared to those countries that still adopting a zero COVID stance as their economy will lag behind due to the pain of exposing their population to the more virulent Delta variant. These countries will see an alarming rise in infections and death rate like what is being experienced in Singapore and it takes time for COVID zero strategy countries to adjust to the new norm along with sporadic lockdowns. So countries like US and EU will probably do better as their population has embraced the COVID endemic lifestyle while countries like China & Australia may see their economy take a short term hit as they start to allow their population to be exposed to the COVID virus.

This is also a good time to put in your SRS and invest them as the markets should continue its bullish trend after this correction as the economies around the world continue to recover from the pandemic.