February 3, 2022
Now is the time of year when commentators like to make predictions then hope vehemently that no-one looks back to them in 12 months. Either because they are proven to be 100% wrong or because, as one fund I knew managed, they were 100% right but the fund had failed to make any money on the back of it. However, I think we can be certain that one of the key predictions for 2022 will be that inflation will be the main topic of discussion, whether transient or not.
As I write, we’ve just seen the latest US inflation data with a headline number of 7% for the first time in four decades. To soften the blow, the Bureau of Labor and Statistics even generated an index which excludes food, fuel, shelter and used cars/trucks (strange mix, feels like data manipulation to me but…) yet even this index is on a 30 year high of nearly 5%.
Slice and dice the data any way you like, it’s apparent that inflation (currently) isn’t transitory and it’s reasonably easy to see why with nickel breaking $22,000 per ton, Copper through $10,000, Oil back on the $85/86 highs of the last 5 years while even Jamie Dimon was forced to comment on the wage inflation in the US which he says is being driven by the “huge pressure” on the US Labor market and which was reflected in the average hourly earnings numbers being strong again in December.
So what does this mean for our markets?
Well, there are already interest rate hikes priced in for the UK in February and May this year to follow the hike in December, while over the pond, the US futures are pointing to at least 3 hikes, maybe 4 this year from the Federal Reserve. Jerome Powell seems to believe the longer maturities of the bond market will be well supported, but with Central Banks across the Globe winding down their bond purchases, is this really an environment where you’d like to have your cash (or pension!) in the new 30-year maturity German Bund which was issued recently offering a generous 0.28% per year until 2052?
All our underlying investments have coupons that reset regularly to give us a short synthetic maturity, while the economic rebound that appears to have been priced into equities for some time should support the growth of our portfolios which happily came through 2021 and 2022 (some Euro 6bn in total) without a single defaulted invoice. Our fund, holding as it does only notes backed by insured (minimum A-) invoices, returned our target 300bp plus over 1 year deposits for 2021 and we look to achieve the same again in 2022 to give our investors and treasurers a short-dated synthetic fixed income component for their portfolios that won’t be hurt by rate rises.
If you haven’t considered working capital for your portfolio up until now, hopefully 2022 will see you have the time to let us help you to learn more about it, just drop us a line.
Have a great time!
Text written by Rick Pearson, CIO Pactum AG