Inflation comes the with effects of war baked-in and hits new high on a par with 1985

Mar 31, 2022

Redacción Mapfre

Redacción Mapfre

This week the consumer price index (CPI) data for March was released, and the figure came in at 9.8%, the highest level seen since 1985 and very close to the double-digit figure that many analysts had estimated for the month. The current forecast regarding the inflation data for the coming months is that it will continue its upward course, which has been dragging on for several months now and has worsened with the conflict in Ukraine. However, Alberto Matellán, chief economist at MAPFRE Inversión, believes that these numbers "are within expectations" and that the trend, supported by exogenous factors, will continue for now: "Raw materials, metals and food are going to push inflation up.”

Rising prices are, for now at least, making their mark on disposable income and affecting consumers’ purchasing power. That said, the expert adds that this situation is also taking its toll on business margins. "If the average person doesn’t see their income increase in line with prices, their purchasing power is reduced, so this is passed along to companies’ P&Ls directly," explains Alberto, who also points out that this "generates uncertainty in people’s decision-making.”

As a consequence, the update of the inflation data in Spain has once again put the spotlight on the idea of ​possible stagflation, a scenario of high inflation and very low, zero or even negative growth. For the moment, and despite the downward revisions in growth expectations, the figures are still high enough (currently, an increase of around 4-5% is expected for this year) to ward off any sense of panic. In fact, Ismael García Puente, investment manager and fund selector at MAPFRE Gestión Patrimonial, believes that, taking the bond curve into account, doubts about a possible recession can be dismissed: “The 10-year bond depends more on growth, so in a recessionary context they should be going down, and that’s not the case.”

These adjustments in the forecasts for the Spanish economy maintain, according to the economist, "a positive differential tension with respect to other countries across the European Union", where the war is having a more negative effect on the trade relations of Germany, for example (where forecasts are being revised downwards more rapidly).

Stock markets recover pre-war levels. Is not the time to invest?

However, all these macroeconomic data are not causing the stock markets to cede territory, and they are on a two-week upward tick, recovering the ground lost since February 24. Despite having added risks such as "war, less accommodating banks and the supply chain crisis", the IBEX35 is paying more attention to other factors, such as companies’ liquidity levels or the LATAM connection with their activity.

In rising times like this, investors may be drawn to equities. Specifically, this week sees the start of the quarterly close, which could point to a rebalancing of portfolios toward more defensive positions. According to Ismael, these movements would stem from "a flow of money from bonds to equities as the only alternative" to this context of volatility. In fact, although in similar situations the most logical response is to retreat to bonds or gold, Alberto sees that "opting selectively for the stock markets at this time" is a good refuge. "They can behave well in a 'soft landing' context (as is being considered in the United States) and can even become a safer strategy than it was before," Matellán clarifies.

At the end of the day, the decision to get into the market or not at this time depends less on the market situation and more on the likely investment term. “If we’re thinking in a six or eight-year time frame, now is a good time. Equities have generally performed well in times of inflation. As long as that doesn't affect demand, we can see valid European companies holding their own in this environment", clarifies Ismael García Puente, although he recalls that, if the investor's horizon is shorter, they may want to "balance out their portfolios or even switch to periodic contributions as an alternative.”

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