Over the past thirty years, interest rates have steadily fallen and despite heterogeneous trajectories for a range of products and services, the general price trend has seen low and stable inflation. Over the next few years, capital markets must resolve two competing trends, the demographic terrain and economic decline that infer deflation and the desire of central banks and governments to inflate away the emergency deficits. This debate explores the risks to client portfolios and the strategies to manage uncertainty over price levels.
Brad Matthews, principal, Brad Matthews Investment Strategies
Nick Langley, managing director and senior portfolio manager, RARE Infrastructure
Scott Berg, portfolio manager, T Rowe Price
MODERATOR: Laurence Parker-Brown, Content producer, Conexus Financial
- The confluence of forces will lead to a continuation of the low-rate environment according to T Rowe Price portfolio manager Scott Berg. Identifying the trend is easy, he said, but coming up with solutions is infinitely more difficult.
- Nick Langley, managing director and senior portfolio manager at infrastructure specialists RARE, said the most obvious certainty about inflation is that it won’t be going anywhere soon.
- Ten-year bond expectations have stabilised at one to 1.5 per cent since April, Langley noted, and when you combine those anaemic nominal bond yields with low inflation you get a real sense of where bond yields are going over time.
- The prospect of long-term low inflation and its trickle-down effects will have a real and continuous effect on other sectors, Langley added.
- According to Scott, the “penny has dropped” for a lot of people that labour force growth in the developed world – a driver of inflation – is “not what used to be”. “It’s pretty clear that we live in a lower growth world than we used to,” Scott said.
- This trend will continue, Scott reckons, as more nations follow Japan’s lead by printing money and setting their interest rate at zero. “That was in no textbook,” he added.
What are your expectations around economic performance in the next few years?