/Investing advice, how to hedge for higher inflation: Morgan Stanley – Business Insider

Investing advice, how to hedge for higher inflation: Morgan Stanley – Business Insider


Inflation has been, and continues to be — perhaps surprisingly — largely left off the list of investor concerns since the US government rushed to provide economic stimulus following the COVID-19 outbreak.

But according to an Aug. 3 note from Mike Wilson, the chief US equity strategist at Morgan Stanley, it would be a mistake to overlook the risk of price increases across a range of goods and services. 

Wilson says inflation could very well be on its way because money-supply growth, a leading indicator, is at an all-time high as monetary and fiscal policy makers support markets and the economy.

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Morgan Stanley


Further, while inflation isn’t showing up in longer-term interest rates, Wilson points to the increase in breakevens — the gap between nominal bonds and their inflation-protected counterparts — and the rising prices of gold and silver as indicators of a coming rise.

Investors who disagree with Wilson widely cite the lack of inflation after the economic stimulus deployed in response to the Great Financial Crisis over a decade ago. But Wilson argues that the circumstances aren’t the same, pointing to the amount and breadth of stimulus in 2020, including “helicopter money” to individuals and businesses, paycheck protection and Main Street lending programs, and guaranteed banks loans through the CARES Act.

These circumstances are “potentially more inflationary than appreciated which means back end rates can rise,” Wilson said in the note. “Very few portfolios are prepared for such an outcome. Such shifts can happen quickly when they are so unexpected.”

How to prepare your portfolio for rising inflation

Wilson points out that cyclical stocks have historically outperformed during inflationary periods. He also says that a weakening US dollar and better-than-expected Q2 earnings so far will benefit cyclicals.

As such, he recommends skewing portfolios even more toward cyclicals than normal

“With many cyclical stocks and sectors recently underperforming on concerns about the recovery, the pitch may be fattest here for new investments,” Wilson said. “This is not to say the COVID beneficiaries/growth stocks can’t do well too, but the valuation and positioning is already reflective of the strong recovery in such stocks.”

The  iShares U.S. Consumer Services ETF is an option for investors who want to gain exposure to cyclical stocks. 

Wilson also says he expects a 10% market correction in the very near term, driven by currently crowded stocks that have led gains since March. 

But such a correction would be followed by a broadening bull market, he says.

“Once that correction is complete we expect the bull market to continue and broaden out based on what we think will continue to be a surprising recovery in the economy and earnings later this year and into 2021,” Wilson said.

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