Inflation in most major economies, including the US, is likely to fall faster than many expect, and interest rates will drop accordingly within the next 12 months, I predict.
There are three key reasons for this.
First, there’s unlikely to be a wage price spiral as real wages are typically doing down despite the increases. Employers now seem to be holding back from increasing salaries on demand, which will help stifle wage inflation.
Second, the time lag for monetary policies is incredibly lengthy. It takes around 18 months for the full effect of rate hikes to make their way into the economy – and that’s where we are – and so financial conditions will get squeezed even harder in the near term.
And third, although many economies are now likely to avoid a full-blown recession, economic growth is still expected to be weak for the foreseeable future.
Against this backdrop of inflation falling faster than expected, I expect central banks, including the Federal Reserve, the Bank of England and the ECB, to start cutting interest rates within the next 12 months.
This is why, he notes, that in the last earnings season, investors were pouring over the guidance more than usual.
Guidance is critical as indicators show the economy is headed for a downturn and investors will be eager to know which companies are best-positioned to manage this. Guidance helps evaluate a company’s past performance in light of its future prospects.
When costs are going up, investors should increasingly be looking at a company's and a sector’s ability to maintain margin.
Investors should be paying close attention to margin because it can indicate how well a company is managing costs and competing in its industry.
It can also impact a corporation’s ability to invest in growth opportunities or pay dividends to shareholders.
Investors should consider now the prospect of inflation falling faster than many have anticipated, to seize the opportunities and mitigate risks.
London-born Nigel Green is founder and CEO of deVere Group. Following in his father’s footstep, he entered the financial services industry as a young adult. After working in the sector for 15 years in London, he subsequently spent several years operating within the international space, before launching deVere in 2002 with a single office in Hong Kong. Today, deVere is one of the world’s largest independent financial advisory organizations, doing business in 100 countries and with more than $12bn under advisement. It specializes global financial solutions to international, local mass affluent, and high-net-worth clients. In early 2017, it was announced that deVere would launch its own private bank. In addition, deVere also confirmed it has received its own investment banking license.
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