Monitoring central bank actions and recognizing mistakes is crucial for understanding market conditions and risks.
Tight labor markets leading to wage growth can pose challenges for central banks in managing inflation.
Investing in commodities and infrastructure assets like toll roads and airports is recommended for inflation defense.
Deep dives
Importance of Central Bank Monitoring
Monitoring central bank actions and recognizing when they are making mistakes is crucial in understanding market conditions and potential risks.
The Impact of Wage Growth on Inflation
Tight labor markets can lead to wage growth, which in turn can pose challenges for central banks in managing inflation. Rising wages can lead to increased pressure on prices and potentially impact the central bank's ability to meet their inflation targets.
Defensive Positioning with Respect to Inflation
In light of expectations for persistent price pressures and higher policy rates, defensive positioning with respect to inflation is recommended. This includes focusing on commodities and investments in infrastructure assets such as toll roads and airports.
China's COVID-19 Impact and Potential for Growth
China has faced challenges in transmitting policy stimulus due to COVID-19, but if lockdown restrictions ease and reopening occurs in 2023, it could potentially provide a positive impulse to global growth. Monitoring developments in China is essential.
Asset Allocation in a Higher Inflation Environment
In a higher inflation environment and expectations of a looming recession, defensive and quality investments are favored. Investors are advised to consider real assets, particularly listed infrastructure, as they offer stability and income streams that can perform well in such conditions.
Originally trained as an economist and now the Chief Global Strategist at Principal Asset Management, Seema Shah spends her time looking at the intersection of fundamentals, technicals and valuation. Our conversation first considers the low growth, low inflation era that persisted post GFC but pre-Pandemic and here Seema distinguishes between strong economic expansion and favorable market conditions. Of course, the opposite has been the case in 2022, as the Fed has been forced to tighten at an exceptional pace and asset prices have suffered amidst strong growth.
Noting the importance of watching Central Banks, Seema asserts that you have to recognize when they are in the process of making a mistake, something that became increasingly apparent as 2021 progressed. We turn to inflation. Seema stresses the importance of labor market tightness, how it leads to wage growth and how that imposes challenges on the Fed’s mission to reduce inflation.
With a view that price pressures will persist and that policy rates will remain higher for longer, Seema and her team are steering clients toward defensive positioning with respect to inflation, focusing on commodities and exposure to infrastructure plays like toll roads and airports. We close our conversation by considering China, where Seema asserts that the transmission of policy stimulus has been impaired by Covid Zero. While the path to reopening is surely uncertain, global growth could see a strong positive impulse at some point in 2023 if lockdown restrictions are eased.
I hope you enjoy this episode of the Alpha Exchange, my conversation with Seema Shah.
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