Equity bulls took another hit last week, as it appears inflation hasn’t yet peaked. Friday’s US CPI Report (just to note the Fed’s preferred measure is ‘PPI’) came in ahead of expectations and has hit a 40 year high. There was further bad news from the UK first thing this morning, as GDP for April came in at -0.3% (MoM) versus a forecast of +0.1%.
Markets remain stuck in a somewhat vicious cycle in relation to economic data. As liquidity has been withdrawn from the system, there has been a return to fundamentals, namely valuations and cash flow forecasting. With it, comes a sharper focus (relative to recent years) on economic releases. Given the inflation backdrop, bad news is simply bad news. However, good news can also be bad news – stronger than expected economic data, leads to higher forecasted interest rates which in turn can hit risk assets.
This can feel overwhelming, but it does come with opportunities. For example, different parts of fixed income yield curves behave differently in these scenarios, whilst certain equity sectors can outperform also. These are some of the concepts we discussed in our Investment Webinar last Friday. Long term returns are what matter, and that is what Zurich aims to deliver. For example, take the Active Asset Allocation Fund – with more than €800m invested. The fund has returned over 7% per annum since inception in late 2010.