Inflationary pressures seem to be easing, and this is a good step for investors to start mitigating their inflation concerns. Inflation data released on Tuesday showed a rise of 0.3% on a monthly basis against estimates for an increase of 0.4%, while inflation without counting in food and energy prices increased by 0.1% compared to estimates for 0,3%.
As we have pointed out again, much of the rise in prices is due to the sharp increase in demand that followed the pandemic. However, such a large increase in demand is not normal to last for a long time and sectors that were found at the center of this vertical increase in demand will return to normal levels.
A possible scenario for the coming months is to see a trend for increased inflation in the services’ sector and not in the well-known basket of the housewife. This is likely to happen as job digitization leads to an increase in the subscription services and therefore to an increased demand for online services.
Inflation and its Impact on Markets - What Risk Makes us Concerned?
The coming months will be crucial in terms of how the inflationary pressures will develop as at the moment the big problem remains in the supply chain, which has led to major shortages and rising prices. In addition, the fourth quarter is a period when suppliers, shoppers and consumers alike prepare for Halloween, Black Friday and Christmas. This may lead to new price increases but also to an additional burden on the supply chain.
So far, the biggest concern of investors is how central banks will react if inflation remains high.
This is a perfectly reasonable risk, but we believe that it may not be the most important for one reason only: because it is already known in the markets. There is an even more important and currently unknown risk: Future company updates from companies that are affected by the conditions prevailing in the supply chain.
Therefore, in the next period if something could cause short-term turmoil, we estimate that this would come from the inability of companies to predict their future sales due to shortages of raw materials and other issues related to the supply chain.
In this environment there are clear moves made by investors. American value stocks, american mega-cap stocks, banks and real estate, already, the returns of these sectors have been excellent since the beginning of the year.
The overall outlook of markets and economies remains strong and this is the biggest support for stocks, which are trying to record higher returns. There are also opportunities in emerging markets, many of which are in the shadow of China and what is happening there. The valuations in relation to the S&P 500 are at levels which indicate an extreme undervaluation of the stocks of the emerging markets in relation to the American stocks.
The chart compares the P / S ratios for the S&P 500 and the emerging market index, with the emerging market ETF which does not include China. It is clear that emerging markets continue to attract capital, but developments in China are overshadowing the procedure. Of course, over time, China will once again make a strong contribution to the emerging markets.