The biggest vaccination campaign in history is underway, with flattening or declining COVID-19 infection rates being reported in countries with effective rollout programs. This is positive news for future health implications of the pandemic, but the financial impacts are more convoluted.
Central banks in the world’s largest economies estimate that because of COVID-related lockdowns, consumers have amassed $2.9 USD trillion in savings. As the vaccinated population grows, stimulus support continues, and consumer confidence increases, investors and economists predict the resulting slush of savings will translate into increased consumption.
Increased consumer spending (i.e. demand) will likely cause a rise in consumer good prices (i.e. short-term inflation) and put upwards pressure on interest rates in the near-term. Bond and share market traders are grappling with weekly inflation data, and we expect this to drive short-term volatility across the globe. As Warren Buffett said, “you measure everything against interest rates. Interest rates act like gravity on valuations.”
We don’t try to time markets or make investment decisions based on speculation or short-term market outlooks. Inflation may occur in the short-term, but long-term structural inflation is likely to be driven by sustained wages growth. Through the rise of automation, and as technological solutions continue to supplant old world jobs and entire industries, wages growth and inflation remain difficult long-term objectives for economies and central banks to achieve.
Diversity remains key
There will always be noise in markets about short-term pricing movements, such as the inflation discussion above, but history tells us that in periods of volatility, the most prudent investors remain invested in a diverse range of high quality assets. We reinforced this to our clients at the beginning of the pandemic as markets struggled with severe uncertainty. Those who stayed the course have benefited, with most asset prices back to pre-COVID levels.
If you would like to discuss your investment portfolio, or have any questions about your personal financial situation, please contact your local Private Wealth adviser today.
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