“Equities can still perform well in an inflationary environment”

The Association of Investment Companies (AIC) has asked investment company managers for their views on the outlook for equities in the current inflationary environment, whether interest rates will rise and how this will affect UK and global equities.

What’s the outlook for equities in an inflationary environment?

Sue Noffke, manager of Schroder Income Growth, an investment trust in the UK Equity Income sector), said: “Inflation continues to be front of mind. However, we don’t see inflation posing a systemic risk for markets and, specifically, equities can still perform well in a modestly inflationary environment especially when they are supported by solid corporate earnings.”

Andrew Bell, manager of Witan Investment Trust, which sits in the Global sector, said: “Rising rates are intended as a signal by central banks that they are determined to curb inflation, but it seems unlikely they will rise very far. This would (given debt levels in the economy) risk a recession that central banks are keen to avoid, as societies recover from the pandemic. So, rather than ‘speak softly but carry a big stick’ they appear to be talking loudly but carrying a peashooter.

“Overall, a growing economy with interest rates remaining low looks more rewarding for equity investors (though there will be winners and losers) than bond investors, who may struggle to maintain the purchasing power of their capital.”

Nick Brind, manager of Polar Capital Global Financials, from the Financials sector, said: “Financials, in particular banks, are the most sensitive sector to rising inflation to the extent that it leads to higher bond yields and interest rates. As interest rates increase, this leads to a sharp rise in the earnings of banks, all things being equal, as loans are repriced and net interest margins widen.”

Ben Ritchie, manager of Dunedin Income Growth, another in the UK Equity Income sector, said: “Provided the economy remains robust and corporate earnings are delivered, then on its own a rising interest rate environment should not be an impediment to decent equity market returns.”

Mark Hume, co-manager of BlackRock (NYSE:BLK) Energy and Resources Income Trust, a fund in the Commodities & Natural Resources sector, said: “Our analysis suggests that natural resources equities have typically performed well in absolute terms and relative to broader equity markets during periods of rising inflation. Unlike broader equity markets and bonds, commodity prices are typically positively correlated with inflation expectations. On top of inflationary pressures, we expect mined commodities to be supported by increased fiscal spending on infrastructure in 2022 as well as demand from lower carbon technologies like electric vehicles. The mining sector is in a strong financial position, with low…