The year of transition

This year is going to be year of transition. We're seeing interest rates go up globally and in fact, I think Central Banks generally are behind the curve, so they have a lot of rate increases to make.

What I think will happen this year is the Federal Reserve will have to raise interest rates more than people expected at the beginning of the year. Most recently, with the latest CPI number, which was close to seven and a half percent in the US, we would say there could be up to seven rate increases in the US this year.

In this market outlook, I answer five key questions for navigating this transitory period.

Transcript

What is your outlook for inflation in Australia?

Basically the RBA hasn't seen the same inflationary pressures, but when you see our economy open up, we already have a low unemployment rate in the fours but I think we'll get unemployment even below 4% this year. And with that, they'll be arguing if there's full employment and then with the inflation numbers, there will be no reason for them not to raise interest rates. Inflation, I think generally is a global theme right now.

Why the 'Dam Busters' metaphor for inflation?

The reason we're using Dam Busters as a metaphor is we think there's a lot of interest rate rising bombs that have to hit the market. And lots of different Central Banks are represented an individual plane that needs to get in the air and carry through and deliver this to break the dam of inflation because inflation's been building up slowly behind the dam.

What do you offer clients in a rising inflation environment?

Generally speaking, most markets have benefited from falling interest rates, so bonds have benefited and equities have benefited from falling interest rates. But we think that now we're in a different part of the cycle and we need to be very cautious about those increases in interest rates that are going to affect all sorts of investments. So what we've been doing for our clients is we've been putting them in floating rate notes and getting short interest rate duration. What that means is we benefit from rising interest rates.

Have policy makers got the balance right?

I think policy makers have stimulated the economy a lot. To get through a pandemic, we probably needed the support but now we need to take the support back as quickly as possible. We were close to full employment before the pandemic. I think we're going to be at a pass full employment very quickly.

What are the key drivers of inflation right now?

So many pistons of pressure on inflation right now. We see energy inflation. We see service inflation. We see goods inflation and even food inflation. I have not seen this in my lifetime. They are all firing right now and that builds into the inflation numbers. The other thing that will build into inflation numbers is the increased price of houses. The increased price of houses gets represented in an equivalent rent, and that gets backed into CPI numbers and that's still to come.

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