Name: Investor Roundtable 2022: A $40 billion fund manager thinks moderate inflation could last 3-5 years
Uploaded: 2021-11-29
Duration: 5 min 46 s
Description: T. Row Price’s David Giroux thinks inflation could level off a bit, but may take a few years to reach pre-pandemic levels.

T. Row Price’s David Giroux thinks inflation could level off a bit, but may take a few years to reach pre-pandemic levels.

Investor Roundtable 2022: A $40 billion fund manager thinks moderate inflation could last 3-5 years

Finance

Investor Roundtable 2022: Inflation concerns

David, I'm thinking of you because you have a role that's explicitly multi asset. How is inflation changing your thinking right now or the outlook for inflation changing your thinking right now about where investors should be concentrating or they might what they might want to be moving away from and moving towards. Sure. I think what's important to think about this, when we think about inflation, We need to think a little bit about 2021 is really the perfect storm. And the inflation we're seeing today is there's a sickly component to it and there's a structural component to it. So when you see what the civil component to it, like last year we said we have easy come. So last year things like hotel prices fell dramatically, airline tickets fell dramatically and this has recovered just normal recovery. So we were always going to see above a normal inflation this year. But then there was a situation where we had this massive stimulus in the economy By the federal government and we also have people had a tremendous amount of money saved in 2020. and essentially what's happening in 2021, if you are spending that and what you're seeing really unprecedented level of demand for consumer durables, Uh, maybe 20% above trend line. Just never have seen it ever in the data before. You know, appliances, exercise equipment, air conditioning, computers, iPads is well above demand. And essentially what happened is it broke the supply chain. The supply chain was just not built produced X plus or 1.2 times X if you will. Right, well, that's just not how you build your your company's right supply chain, you know, driver shortages, uh, civic security issues at all driving inflation Right now. Now the good news about that is is that that stimulus is kind of kind of wane a little bit as we think about the second half, 2022 Into 2023 I think demand for appliances and home and all this other stuff will probably return to back a little bit too normal. So some of the supply chain cyclically driven inflation is likely to be transitory, probably go away as we kind of think about, you know, going to 2023. But we've alluded to this before there is some structural things that would probably result in inflation being a little bit higher than it was in the five years prior to Covid. And then we talked about a little bit about that. It's really the, let's say the the worker who doesn't have a college education and essentially what we're seeing here is demand for those people is going up pretty strong, pretty, pretty strongly. Uh and they have more options than ever. Whether it be amazon whether it be gig jobs that offer tremendous amount of flexibility and honestly, demographically that population is really not growing very fast. So essentially what we have to have happen is we need to have wages rise fast enough over time today if you take people who are not working and encourage them to work and that, that's going to take time or it's just gonna take time. So I, what I think what you're going to see is We're probably not, we're not going to go to four and a 1/2% inflation forever. That's just very, very unlikely to happen. But I think the next 3 to 5 years you could see inflation be moderately higher than we saw on the pre pandemic level because of these demographic issues that are impacting the economy. So how does that impact investors behavior or I should say how ought it shape and investor strategy and behavior. Well, let's, let's talk about anything that has any name, any stock is kind of an inflation place already done really, really well. So I don't think investors should go and kind of chase that theme, especially that theme will probably be accelerated, right? You want to go to where, not where the puck is today, where the puck is going to be in a year from now. Uh, and then a year from now we're gonna be talking for much slower inflation we are today. So I don't think anyone should go out there and I want to buy, coming to that purchasing power. I want to buy materials companies run by energy companies. I think that would be a mistake if there's already already run dramatically. I think there's probably better value in other parts of the market. What about outside of equities about in fixed income or things like that? You know, one of things that, you know, again, I run a large multi asset strategy and I think one of the asset classes that I think about it being really attractive relative to all the other options is kind of leveraged loans. So, you know, you know, I own, you know, $8 or $9 billion dollars of leveraged loans of my strategy today, that was the attention of the portfolio. Uh that was 1% a couple of years ago. And I think leverage loans really offer a really attractive risk reward in the marketplace today. You kind of get your top of the capital structure, you're floating rate in nature. If rates rise, you benefit from that. So you don't really lose anything from that. If rates able to get a 4% return And you know, if rates drop, which I don't think they're gonna drop dramatically from right here, you're probably not gonna hurt that much at all. So it's just the risk reward looks really attractive and contrasted with all the other markets we can invest in equities trading, it you know, 22 times the median company, the markets now at the same multiple was back in 98 99 kind of the dot com bubble. You know. Treasuries are very expensive with a yield of 1.5 when inflation is probably like I said, a little bit above trend or will be a little bit above trend next over years, uh, you know, investment grade bonds almost that attractive. And so I don't think leverage loans. Yeah. The idea of earning four With one third of the volatility equity market for most investors, most risk adverse, risk aware investors makes a lot of sense. And that's, again, that's where we were really, uh, like I said, added about $70 billion dollars to the portfolio. Little loans made attempts of the portfolio in the last, uh, last couple years.