Inflation, if within a certain band, is generally considered a good thing. It signals there is strong demand for goods and services, a sign the economy is expanding.
However, inflation can bring challenges to investing. In an inflationary environment, interest rates tend to rise, which pushes the price of bonds lower as debt obligations on the bonds increase. Furthermore, some equity sectors can be sensitive to rising rates; as the risk-free rate rises, it can be harder to justify some equity prices – often prevalent in the growth sector.
However, some sectors are traditionally attractive in this environment, namely value or cyclical stocks, which benefit when an economy is expanding. Banks for example can benefit from inflation and rising interest rates. They can take advantage of a steepening yield curve by borrowing at the short-end of the curve where interest rates are lower and lending out at the long-end, where interest rates are higher.
Given the dynamics of an inflationary environment – one we have not seen in the developed world in more than a decade – we believe that active management could not be more important. As an active manager, ANZ Investments have the tools to navigate what can be a tricky, yet rewarding investment environment.
Despite the uncertainty of a post-COVID environment, we approach our investing with a long-term focus and are confident we can deliver consistent returns to our investors over the long term.