“We’ve seen bond yields rise, albeit modestly, we’ve seen curve steepening and we’ve seen market expectations of inflation start to creep up from the lows we saw back in March this year.”
The Australian 10-year yield has climbed to 1.08 per cent from 0.61 per cent in March. The US 10-year has risen to 1.11 per cent from a low of 0.5 per cent in August.
Australian investors will get an update on price pressures when the fourth quarter consumer price index is released next week. Commonwealth Bank expects headline CPI to increase 0.9 per cent in the quarter, for a year-on-year rate of 0.7 per cent.
The Reserve Bank of Australia has committed not to increase interest rates until inflation is “sustainably” within its target band of between 2 per cent and 3 per cent.
The central bank’s relaxed approach to inflation is aimed at reviving the economy and boosting the jobs market. December jobs data will be released on Thursday: 50,000 new jobs are forecast to have been created.
“We don’t see inflationary pressure over the next 12 months,” said Tribeca portfolio manager Jun Bei Liu.
“However, given the amount of activity at the moment globally, how quickly it’s picking up, as well as the strong stimulus globally that will stay in place, we certainly see inflationary pressure building over the next two years or so.”
Muted inflation combined with low interest rates is helping fuel the run in stocks. Low bond yields means investors are confronted with an environment of TINA: There Is No Alternative but to own stocks.
“The reality is we live in an economic environment of not much growth, interest rates are very low, and with inflation staying low and assuming that stays the same, it is a reasonably fertile environment for stock picking,” said Munro Partners chief investment officer Nick Griffin.
While understanding why investors were buying cyclical stocks on a six to 12-month view given the anticipated rebound in growth, he said stronger longer-term portfolio performance would come from stocks exposed to structural growth themes that offered growth double or triple that of GDP growth.
While high performance computing and digital enterprise were two major themes for Munro Partners, the fund’s biggest exposure was to stocks exposed to climate change.
“We think this is really the next big structural opportunity in the world for the next 20 years,” Mr Griffin said.
“Clearly, Joe Biden winning the presidency was helpful, but it was all going to happen anyway.”
Ms Liu sees five major themes driving the markets over 2021: return to work, reflation, higher dividends, housing, and structural growth.
She said analysts were “absolutely underestimating” the operating leverage of retailers JB Hi-Fi and Harvey Norman as the housing market continues to strengthen.
She also talked up the need to have exposure to structural growth plays, saying recently listed Nuix offered “enormous” exposure to growth of the cloud, big data and the and security.
Ms Liu expects an increase in dividends of 30 per cent in the 2021 financial year.