Impact Blog
Global economy and inflation: Time to 'pay the piper'?

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Calvert disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Calvert are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Calvert fund. References to individual companies for Engagement or Research purposes are provided for illustrative purposes only and may not be representative of the results of all of Calvert’s engagement efforts. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results.

  • All Posts
  • More
    Topics
      Authors

      Filter Insights by Date:   Start Date   End Date   or  Show recent results
      The article below is presented as a single post. Click here to view all posts.

      By Ian KirwanGlobal Equity Analyst, Eaton Vance Advisers International Ltd.

      London - In our recent quarterly outlooks, we have written about the inevitable need for the global economy to "pay the piper." By that, we mean that we believe the huge amounts of stimulus injected into the economy during the COVID-19 crisis, both from central banks and governments, will come at a price.

      Higher taxes, which are now being debated in the U.S. and U.K., are one element of this. Another important area is inflation, which is seeing upward pressure from the strong economic recovery and supply chain issues associated with the coronavirus crisis. According to a May research report published by Credit Suisse's global strategy team, "Inflation tends to be question number 1 in our client conversations."

      The good, the bad and the ugly

      Our CIO of equities, Eddie Perkin, has talked about "good inflation and bad inflation." Modest inflation is good for businesses and consumers. As we've learned from Japan's multidecade deflationary experience, zero inflation can lead to years of subpar growth and impair consumer spending. This is obviously a bad thing. Finally, we have the ugly impact of inflation — when it runs out of control. Most investors and management teams have little experience with this and one has to go back to the 1970s and 1980s to understand how rampant inflation impacted consumers, businesses and interest rates.

      Pricing heading higher?

      The topic of inflation has featured prominently in corporate earnings calls this reporting season, which is ongoing. From semiconductor shortages to logistical bottlenecks, it is clear that many companies are increasing prices to offset inflationary pressures. Ultimately, the duration of this pressure matters most. Interestingly, the same report from Credit Suisse states that about 90% of clients agree with central bankers who believe the rise in inflation will be transitory. These bankers are telling the market that inflation will be a temporary phenomenon, brought on by the extreme volatility of the COVID crisis. Higher unemployment due to COVID-19, coupled with the deflationary impact of technology and automation, could mean we return to the same levels of mild inflation to which we have all become accustomed.

      We can expect this debate to dominate financial market commentary for the foreseeable future. If both inflation and bond yields move higher for longer, it could have a significant impact on asset allocation decisions, reshape portfolios and influence how investors value stocks and bonds.

      Franchises with sustainable moats

      The investment process for our international equity strategies concentrates on the sustainability of business models. We have tried to build portfolios of companies that can ride out any storm, from deflation to inflation. Pricing power has always been an important area of focus for us, where brand strength and market share/position play key roles. From industrial to consumer sectors, our companies' management teams are telling us that raw material inflation is running hot — at levels not seen for 10 years or more. Whether a leading semiconductor or consumer products company, we think that the brand, competitive advantages and durability of the franchises in our portfolios will see them through temporary or elongated inflationary pressures.

      Bottom line: In conclusion, when clients ask about inflation, we think you should tell them it's real and the pressure is building. How high inflation may go and how long it will last are, of course, impossible to forecast. However, the international equity strategies we manage have been built to weather macroeconomic volatility over the long term, and we believe will be successful in doing so.