In a recent podcast, ClearBridge Investments portfolio manager Shane Hurst said that following a record $1.9 trillion stimulus package introduced by US President Joe Biden, markets could expect a modest increase in inflation later in 2021.
“There’s been a lot of helpful support by central banks around the world as they’ve reduced interest rates, started quantitative easing, and obviously massive fiscal support in the US which has been much greater than people expected,” Mr Hurst said.
“In conjunction to that we’re going through a recovery which will likely gain some substantial steam by the end of the year, so our view is there will be some type of cyclical inflation from that.
“We see an increase in inflation off a very low base at the end of the year, but long term our expectation for inflation is around that 2 per cent mark.”
Mr Hurst said while defensive assets like listed utilities and infrastructure – such as toll roads – often benefited from a pass-through in inflation built into the terms of the asset, they still tended to experience declines in share price as investors favoured more growth-oriented stocks during a bull market.
“If you look at most global listed infrastructure indices, they are dominated by utility type assets. Utility assets are defensive assets so in periods of rising bond yields, what happens is people underweight their exposure to those defensive type assets so they can take more equity upside, higher beta-type upside during those periods,” he said.
“It makes sense that during those periods your regulated utility assets underperform general equities.”
However Mr Hurst said once markets adjusted to a boom or recovery period, infrastructure assets tended to outperform in the longer-term, particularly those tied to growth-related thematics.
“If you look at our asset allocation, for our value strategy, we’ve significantly increased our transport infrastructure up to 40 per cent and for the income strategy, we’ve doubled our exposure over the last five months. That leverages that pick-up in GDP,” he said.
“The utility exposure we’re taking also isn’t vanilla exposure, it’s those utilities that will perform well in that rising yield environment. Those utilities have specific idiosyncratic drivers, whether they be restructure spin offs or whether they’re leveraged to multi decade thematics like decarbonisation.”
