Reinhard Panse's Perspectives
Reinhard Panse's Perspectives
Podcast
30.6.2021
The spectre of inflation is once again on the loose. Inflation rates have been rising for several months now, even if you exclude volatile factors such as energy and food prices, i.e. look at the so-called core inflation rate. In my May article, I already explained why this increase is probably not a temporary phenomenon and why I expect higher inflation rates in the coming decade.
Traditionally, investors expect higher interest rates in response to higher inflation rates, which in turn reduces interest in equities as an asset class. So is there now a threat of a slump in share prices if investors move their money into other areas?
The short answer is: no. And this is not because generations of economists have made a false connection between inflation, interest rates and share prices. It is because the link has been more or less destroyed by central banks in recent decades. In the USA, the interest rate has fallen from around 14% in the early 1980s to 1.45% today. At the same time, however, the inflation rate hardly fell at all.
The explanation for this is provided by another, much more powerful influencing factor compared to the inflation rate, namely government debt in relation to national income. According to our calculations, 80 % of the interest rate movement can be explained by rising government debt alone. This leaves little room for other influencing factors - such as inflation.
Government debt will not fall in the coming years either, due to factors such as demographic change with rising healthcare costs, combating the consequences of the pandemic and climate change. This applies not only to the USA, but to all other industrialized countries, and increasingly also to China. Accordingly, interest rates will rise only slightly or not at all, despite higher inflation rates.
This means that the environment remains positive in the long term, particularly for those parts of the equity market that have benefited little from the fall in interest rates in recent years and that are less susceptible to general price increases. These include consumer staples stocks, healthcare stocks and, from a regional perspective, European stocks.
Reinhard Panse's Perspectives
30.6.2021
Reinhard Panse
The inflation rate is rising - and will probably continue to do so over the next ten years. Traditionally, this would have a negative impact on the stock markets. However, thanks to the high level of government debt, this correlation no longer exists.
The spectre of inflation is once again on the loose. Inflation rates have been rising for several months now, even if you exclude volatile factors such as energy and food prices, i.e. look at the so-called core inflation rate. In my May article, I already explained why this increase is probably not a temporary phenomenon and why I expect higher inflation rates in the coming decade.
Traditionally, investors expect higher interest rates in response to higher inflation rates, which in turn reduces interest in equities as an asset class. So is there now a threat of a slump in share prices if investors move their money into other areas?
The short answer is: no. And this is not because generations of economists have made a false connection between inflation, interest rates and share prices. It is because the link has been more or less destroyed by central banks in recent decades. In the USA, the interest rate has fallen from around 14% in the early 1980s to 1.45% today. At the same time, however, the inflation rate hardly fell at all.
The explanation for this is provided by another, much more powerful influencing factor compared to the inflation rate, namely government debt in relation to national income. According to our calculations, 80 % of the interest rate movement can be explained by rising government debt alone. This leaves little room for other influencing factors - such as inflation.
Government debt will not fall in the coming years either, due to factors such as demographic change with rising healthcare costs, combating the consequences of the pandemic and climate change. This applies not only to the USA, but to all other industrialized countries, and increasingly also to China. Accordingly, interest rates will rise only slightly or not at all, despite higher inflation rates.
This means that the environment remains positive in the long term, particularly for those parts of the equity market that have benefited little from the fall in interest rates in recent years and that are less susceptible to general price increases. These include consumer staples stocks, healthcare stocks and, from a regional perspective, European stocks.
About the author
Reinhard Panse
Reinhard Panse is Chief Investment Officer and co-founder of FINVIA Family Office GmbH. Until February 2020, Reinhard Panse was a member of the Management Board and Chief Investment Officer for HQ Trust GmbH, which is owned by the Harald Quandt family. From 2004 until joining HQ Trust GmbH in 2011, Reinhard Panse was Chief Investment Officer of the UBS Sauerborn business unit created within UBS Deutschland AG. From 2001, Reinhard Panse was a member of the Management Board of Sauerborn Trust AG and its legal predecessors. He was responsible for the investment strategy and played a leading role in the holistic asset management and administration of large private assets. Reinhard Panse began his career by taking over capital market and client support activities at Feri GmbH in 1989, after having founded and managed his own wealth management as managing director.
