The confluence of forces will lead to a continuation of the low-rate environment according to a panel of experts gathered for the Professional Planner Digital Researcher Forum 2020. Identifying the trend is easy, said T. R Price portfolio manager Scott Berg, but coming up with solutions is infinitely more difficult.
“Its’ really unchartered waters on this thing,” Berg said, adding that while many people have opinions on the matter, central bankers are confounded. “Let’s be clear, this is a really hard problem.”
Berg said that when confronting economic themes such as inflation he likes to break the issue down into categories.
“What are the things I know? What are the things I don’t know but I could know? And what are the things that are just kind of unknowable or hard for everyone?” he said. When it comes to inflation, Berg reckons, most of the thinking settles on the latter.
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.
“We are looking at a lens of negative real yields, and that, we think is going to sit in the range of zero to minus 0.5 per cent for the next few years,” Langley said. “And that’s certainly where the market’s pricing today.”
The prospect of long-term low inflation and its trickle-down effects will have a real and continuous effect on other sectors, Langley added.
“That has real implications for equity markets [and] it has real implications for things like P/E multiples,” he said. “Obviously in our space on the infrastructure side utilities are somewhat bond sensitive.”
Not in any textbook
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.
There is a scenario that could develop, Scott believes, where inflation and rates are separated, “where the interest rate is not a market price and the governments cap will control and set a rate that doesn’t change even though inflation does”.
“And that’s what I think we are going to start to see more of – very managed interest rates which are no longer true prices.”
