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According to the presenters, about 9 out of 10 opinions have been of the view that inflation is transitory, so the majority of professional investors right now believe that the fears around inflation are overdone.
Additional points below regarding where our view is on the markets.
Table of Contents
Why Inflation is transitory
Inflation is driven by both sides of the equation, supply and demand.
On the supply side, we have had an artificial restriction because of difficulties around COVID.
The physical commodities are still there, there isn’t a lack of it.
As companies continue to adapt to COVID conditions and COVID comes under control, we should see supply issues continue to abate.
On the demand side, rising commodity prices and demand is likely from front-loading of inventory due to inflation fears.
Rising commodity prices however is unlikely to translate to meaningful consumer price inflation.
This is because commodity input prices tend to be a small percentage of finished goods.
Even for something like a mobile phone, about 40% of the input costs are from other processed goods like chips and CPU’s.
If we are to break that down to raw materials, it’s probably approaching well less than 20%.
The majority of the costs come from things such as wages, marketing, R&D and profit margins.
Additionally, volatile commodity prices are nothing new.
Companies are used to dealing with fluctuating input costs and can absorb the costs if the costs are temporary.
Permanent inflation comes from wage growth
Inflation has to come from wage growth, something that hasn’t eventuated for a long time.
The current rise in consumer demand is from free money, not from cheap money.
Free money such as stimulus checks is creating transitory inflation, similar to a bonus check.
If there isn’t a meaningful rise in wages which gives higher purchasing power permanence, there won’t be inflation from demand.
Cheap money hasn’t created inflation either. The world has experienced zero to negative interest rates since 2008 and inflation has been anemic throughout this period.
It is unlikely cheap money will create inflation as it hasn’t done so in the past.
Additionally, it is unlikely we will see wage growth from infrastructure spend.
From 2018-2021, the Australian government spent $8-9b per year on infrastructure.
The latest budget earmarked $11b over 10 years for infrastructure, just 20% more than how much we spent historically.
Australia’s spend is about $45 per person per year. In contrast, the US is spending $2 trillion over 8 years. This is about $760 per person per year or 17 times higher than in Australia.
The US will likely experience inflation from the infrastructure spend, but it is unlikely Australia will.
My outlook for the Australian stock market
I continue to be medium to long term bullish this year.
However, I am cautiously optimistic due to inflation and rates rise fears, even though I feel that is misplaced.
At the moment, value stocks such as banks and miners are trading much too high and am looking more towards growth stocks that have taken a beating in the past month or so.
The recent pullback in the market has been orderly. I am looking to stay net long and to buy the dips and add to long positions this month.
There is currently strong support at 6800-6900 and I am looking for a retest of the 7,200 all-time highs where I would consider reducing long delta exposure.
