Here’s what big investors are really doing to stare down inflation
From Howard Marks to Cathie Woods, the outlook for inflation and rates is dividing the market. But a new survey suggests big investors remain bullish.
Jan 19, 2022 – 11.16am
Another day, another dose of red for Ark Invest founder Cathie Wood, the poster child for the high-growth, tech-focused investing that has dominated the market up until about six months ago.
Yet another sell-off in tech stocks on Wall Street hit Wood’s flagship ARK Innovation ETF on Tuesday night, with the portfolio losing 4.1 per cent in a brutal session.
Inflation concerns are dividing market opinion, but big investors remain bullish. David Rowe
The fall means it is now down more than 50 per cent since last February. Much of the damage has been done in the last three months, as surging inflation in the US has led to rising fears that the Federal Reserve will deliver multiple interest rate hikes in 2022.
Wood took to Twitter in an apparent attempt to counter the idea that the inflation genie is out of the bottle, pointing to forecasts from Nancy Lazar, chief economist of Cornerstone Macro.
Lazar argues data will show headline inflation peaked in the December quarter at around 6.6 per cent and will be back at just 1.8 per cent by the end of 2022, as pandemic-related spending on goods drops, supply bottlenecks ease and the impact of rising wages is offset by higher productivity.
But Wood’s faith in Lazar’s view stands in stark contrast to both market movements and the views of several other high-profile investors.
As Wood was tweeting, Oaktree co-founder Howard Marks was expressing his concerns about inflation and the Fed’s inevitable reaction. “I am worried about inflation. Inflation is excessive,” Marks said in a Bloomberg TV interview. “Higher inflation means higher interest rates, higher interest means lower asset prices.”
David Rubenstein, co-founder of US private equity giant The Carlyle Group, went further, telling an event in New York that markets are due for a correction (typically defined as a drop of more than 10 per cent) and rising rates are the likely trigger.
Now, that’s hardly an outlandish suggestion, given the S&P 500 is down 4.6 per cent since the start of the year and the Nasdaq is now down 7.8 per cent. But the correction Rubenstein sees will start when the Fed actually starts raising.
He too sees inflation falling in the back half of the year, but only to somewhere between 3 per cent and 4 per cent, “but that’s still double what we’ve had and a lot of people are nervous about it … It won’t be quite as bad as it was in the ’70s, but it’s not going to be 2 per cent for a while.”
In the space of a few hours on Tuesday night, Marks, Wood and Rubenstein neatly illustrated the divergence of views in the market on inflation, rates and how asset prices react.
Markets are built on differences of opinions of course, and it’s natural that a period like this would see a range of views, given how rare periods of rising inflation and interest rates have been.
But what’s particularly fascinating is that amid these myriad predictions, professional investors remain bullish, and are moving in a pack.
While the latest Bank of America survey suggests investors are braced for three Fed hikes in 2022, chief investment strategist Michael Hartnett says bullishness about global re-opening is clearly trumping fears that higher rates will derail markets.
There is some repositioning to take inflation into account, with shifts from growth into value (the net allocation to banks rose a staggering 21 per cent during the previous month, while exposure to tech plunged to the lowest levels since 2008) and into commodities, which are seeing the highest allocation in the 20-year history of the survey.
But there are few concerns about a recession emerging, or COVID-19 proving a tail risk for Wall Street.
Given all the talk about inflation and the skittishness on global markets, the bullishness described in the survey is a reminder that for many investors, equities remain the best bet in what is still a low-return world.
But as Wood knows, the key is which stocks to hold.
