19 02/21 19/02/2021

Higher inflation can benefit value

After more than a decade of mild inflation and deflation, inflation is likely around the corner. Peter Berezin, Chief Global Strategist at BCA Research thinks that inflation will increase significantly in the upcoming months. This is due to the fact that inflation data is based on year over year changes. In other words, the increasing prices in the following months will be compared to the flat to decreased prices back in 2020. The fact that many are calling out inflation may also help boost consumption, said Berezin. If higher prices are expected consumers will prefer making purchases as soon as possible. On the supply side suppliers are likely to postpone sales for now so to benefit from higher prices later. This increased demand coupled with the decreased supply will accelerate consumption and thus inflation.

It is important to mention that the U.S. central bank (Fed) has a 2% target rate for inflation. Since the inflation rate has consistently been below 2% the last couple of years, the Fed will allow a slightly higher inflation rate before intervening with higher interest rates. This is known as an average inflation target. Berezin suggested investors lower their fixed income duration and opt for value stocks instead of growth. By doing so investors will be better prepared against inflation and will be able to benefit from it, said the strategist.  

According to the analysts at Schroders Global, growth stocks tend to do good in a deflationary (decreasing prices) period. This theory holds true so far seeing that growth has outperformed value this last decade and we were indeed in a deflationary period. In an inflationary period it is the other way around. Value stocks are expected to outperform their growth counterparts. This coincides with Berezin’s suggestion that value stocks are more suitable investments for the coming decade.
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