Sticky inflation may spoil the party for equity investors: Analysts

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The likelihood of inflation being sticky rather than transient, as most experts had thought, might dampen global equities market optimism, reported the Business Standard, quoting analysts. The cautious posture is prompted by rising commodity prices, particularly crude oil, which last week surpassed $84 per barrel.

“All of this indicates that equities, particularly highly valued growth stocks, are becoming increasingly risky. If rising inflation fears and concomitant Fed tightening fears are to blame for the expected selloff, a further large rise in oil prices has the potential to exacerbate the current inflation alarm dramatically,” the report quoted Christopher Wood, global head of equity strategy at Jefferies, as saying in the latest weekly note to investors.

Inflation

In the context of Covid-19, the easy money policy of global central banks, particularly the US Fed, to help economies through the uncertain era had prompted an uprise across most asset classes, particularly stocks, in emerging markets.

The S&P BSE Sensex and the Nifty50, two Indian leading indices, have risen 28% and 31%, respectively, so far in 2021.

“There’s also the question of sour input costs and whether or not businesses can pass these on to customers,” Christopher is further quoted as saying.

“Hold on to your seats if the Fed is mistaken about temporary inflation. Financial markets will price the Fed’s conundrum of no simple policy options,” the report quoted Nomura as saying.

“Focus on companies that will gain from the economy’s reopening and are less sensitive to rising input cost pressures,” the report quoted Credit Suisse Wealth Management as saying.

Brent crude surpassed $85 per barrel for the first time in London since 2018, marking the latest milestone in a global energy crisis that has seen prices surge.

On Friday, the global benchmark crude broke through a critical level in intraday trading, while US crude futures also rose.

The electricity market is experiencing increased demand for oil products as a result of the gas and coal shortages, and some banks expect prices to rise even more over the winter in the northern hemisphere. It’s also starting to deplete stockpiles: Cushing, the largest US storage centre, saw an unusually substantial supply fall this week for this time of year.

After being slammed by two Covid waves, India’s economy is slowly rebounding, according to the International Monetary Fund (IMF), but the government should be wary of inflationary pressures. As the recovery progresses, the agency recommends a gradual reduction in monetary policy support. It was agreed that maintaining a flexible monetary policy is still appropriate.