Inflation presents investors with opportunities

Yasmine Raso

Senior Journalist, Financial Newswire

22 August 2023

A new report from the Franklin Templeton Institute has emphasised the positive impacts of inflation on new investment opportunities in areas such as fixed income and emerging markets.

Author of the paper, the institute’s Chief Market Strategist Stephen Dover, CFA, said the report came after a panel moderated by himself and featuring several chief economists from across Franklin Templeton’s brands concluded that inflation was here to stay for the foreseeable future and that new opportunities for investors have arisen.

“There are some indicators that point to slowing inflation and the global economy entering a period of disinflation, where the rate of inflation is falling and prices are not increasing as rapidly,” Dover wrote.

“Failure of inflation to retreat is a risk, and core price inflation has been sticky, but the lagged effects from tighter monetary policy have yet to be fully felt. There is less risk of deflation, where prices actually fall.

“Fixed income investments are resuming status as good portfolio diversifiers. Unlike 2022, where both fixed income and equities had negative returns together, there is now a low correlation between fixed income investments, equities and other risk assets.

“Emerging markets can provide diversification. Many emerging markets have demonstrated strength, partially by controlling debt issuance to a greater extent than their developed market counterparts.

“They also reacted quickly to bring inflation under control, raising rates ahead of the European Central Bank (ECB) and the Fed. With many emerging market bonds enjoying attractive yields, this asset class provides another source of return that is not necessarily synchronised with the rest of the world.”

The paper also highlighted the “uneven” recovery experienced across several economies, with China struggling to find its footing as other Asian countries take the spotlight.

“China is struggling to find sources of economic growth. An expected surge in growth did not materialise following post-COVID reopening. The Chinese government is likely to step in with more macroeconomic stimulus,” the paper said.

“Supply-chain rebuilding and friend-shoring should contribute to growth opportunities in some countries. Supply chain rebuilding is leading to increased investment within Asia, particularly in countries like India and Indonesia. Other countries that should benefit include Mexico and Canada.

“Japan benefited from recent increases in inflation after struggling with low economic growth for decades. The current inflation and growth levels created opportunities to deploy corporate cash balances. Japan also benefited from higher female participation in the labour force that prevented a labour shortage, which in turn supported growth.”