Wealth Strategies
Inflation To Stay Elevated; Stick With Stocks, "Real Assets" - Credit Suisse

Inflation will start to peak in the coming months but will remain elevated for some time, while the world returns to a more "normal" picture in terms of interest rates. In this context, investors should stay in equities and real assets such as real estate.
The rise in inflation seen during recent months is unlikely to be
transitory and governments will use it to deflate the real value
of heavy debts incurred before and during the COVID-19 crisis. In
that scenario, investors should focus on equities and real assets
such as property and be wary of government debt, Credit Suisse
explained in its outlook for next year.
2022 should see a continuation of the shift towards recovery, the
Swiss bank said, predicting that the global economy
will grow by 4.3 per cent. Although several central banks
have started to withdraw pandemic stimulus, interest rates are
set to remain at or near zero in the major developed economies.
Against this backdrop, equity returns should remain attractive,
although they are likely to be more moderate than last year, it
said.
A central question is whether inflationary pressure is a
temporary problem or likely to turn into a stickier issue,
particularly if labour markets are tight and price pressures
fuel wage and salary demands. The question of what is the
most suitable asset allocation mix for wealth management clients
to adopt, hinges on the outcome of that debate. Low yields on
listed equities and bonds have helped fuel enthusiasm for less
liquid asset classes such as private equity and venture
capital.
Investors shouldn’t suppose that inflation will be a temporary
matter, Michael Strobaek, global chief investment officer, head
of investment solutions and products, told journalists this week
in a conference call.
There is a transition to a more normal interest rate environment
from the ultra-low levels that rates have been at for the past
decade, and the multi-decade era of “the great moderation,” when
globalisation, macro-economic policy and technology conspired to
keep inflation pressures low, Strobaek said.
Another force that is likely is expanding government intervention
in the economy – another pushback against forms of globalisation,
he said.
Recent central bank stimulus measures amid the pandemic have
buoyed financial markets, but it is not normal to expect this to
be repeated, Strobaek said.
Even so, the outlook for equities and real assets in general is
positive because there is a limited supply of these, contrasting
with unlimited amounts of government debt, he said. “We advise
clients to stay long of real estate and equities.”
With exceptions, the outlook for the fixed income market,
particularly in government debt, is going to be more volatile,
Strobaek added.
In its report, Credit Suisse said this of inflation: “We estimate
that global inflation rates – being a measure of the change in
prices – increased by 3.5 per cent in 2021. The rate of change in
price levels should start to peak going forward. This is because
much of the initial recovery in prices is now behind us (i.e.
base effects are fading), while there should be fewer supply
chain disruptions ahead.
“However, other factors will likely prevent inflation rates from
falling all the way back to pre-pandemic levels. One of these
factors is the tightness of labour markets. The economic recovery
in 2021 helped to bring back many jobs, and unemployment rates in
many countries are close to levels prior to the pandemic.
“With the expected recovery in the services economy in 2022, we
think the labour market could quickly become tight with
demographics exacerbating the issue in many countries. In fact,
we already see labour shortages in everything from bus and truck
drivers to substitute teachers and restaurant workers. Tight
labour markets should improve the bargaining power of workers in
wage negotiations. Consequently, while we expect inflation to
decline as the year 2022 progresses, this should ensure that the
annual average rate of inflation stays elevated at 3.7 per cent.
In 2019, global inflation stood at 2.5 per cent,” it
said.
Credit Suisse said that it expects high single-digit equity
returns in 2022 compared with double-digit returns in 2021. Other
tailwinds for this asset class going forward include the ongoing
economic recovery, and the “there is no alternative” argument for
equities.
On currencies, the bank said that those which will be favoured
are those that can benefit from their central banks’ gradual move
towards normalisation. For example, it predicted that the US
dollar could strengthen against the Swiss franc and Japanese yen,
while the Canadian dollar, New Zealand dollar and Norwegian
kronor could be supported. The euro will be under pressure in the
earlier months of 2022, it said.