Rising US inflation is creating some volatility and affecting relative sector performance. We think investors should adapt their equity strategy and list four ways to limit the impact of rising inflation, or even benefit from it. If inflation rises because of stronger than expected consumer demand, that demand should benefit consumer discretionary stocks. If it is fiscal spending triggering inflation, that spending should support our clean energy theme. Third, price pressures due to supply chain bottle necks may lead to re-onshoring and benefit our automation theme. And finally, amid strong aggregate US demand, we think that adding small and midcaps makes sense.
- Our view continues to be that inflation should remain limited in the long term, but that there are significant short term cost pressures, which are already evident in the data.
- Rising inflation should not cause investors to flee from equity markets, because the Fed is planning to keep its policy rate unchanged. But it should create continued volatility and affect relative stock and sector performance.
- We think investors may want to analyse where the inflation is coming from, and take exposure to these areas: rising consumer demand; the sharp increase in US fiscal spending; bottle necks in the global supply chain; or, more simply, strong aggregate US demand.