Bond markets are, for the first time, taking the prospect of a pick-up in inflation more seriously and starting to express the concern that the benign narrative of central banks being ‘behind the curve’ could morph to being ‘asleep at the wheel’.
At the company level, we have over the last few weeks seen increasing evidence that tightness in labour markets was leading to (in some cases significantly) higher than expected wage inflation. This has been seen not only in the US but also across Europe. It has, in fact, been something of a conundrum as to why both debt and equity markets have largely continued to discount a moribund pricing environment when there appears to be clear evidence to the contrary. Perhaps the answer is to be found in considering the rapid rise of passive funds and other styles of ‘industrialised capital allocation’.
As more and more money simply tracks the market, it is reasonable to believe that the market is less of the discounting mechanism than it has been in the past and is more susceptible to reacting in a more volatile way to published data. Additionally, as these data points shake asset allocators out of established, long-standing views, we should expect that these are reflected in shifts in positioning which can and will result in the type of volatility in markets that we have seen over the last couple of days.
In this context, what we are experiencing in the markets should be seen less of a sign of forewarning more challenging times ahead but more the result of shifts in ownership of the instruments used by asset allocators to gain certain ‘exposures’. As individual prices are pushed around by these technical factors, the more opportunities fall the way of long term investors.
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