Silver lining to the inflation curse

Increasingly hazy macro landscape as risks manifest

Not all price increases can be attributed to the abundance of cheap money. The shift in dynamics due to the pandemic has also led to demand-supply mismatches, for example, in the global semiconductor market. Secular growth in sales of electronic devices, cloud services, 5G networks and AI services as well as pent-up demand for automobiles have fed into the persistent upward spiral in prices of integrated circuit (IC) chips since the pandemic has started to wane. Russia’s prolonged invasion of Ukraine is also amplifying price pressures, including from energy products (petroleum, natural gas, kerosene and LPG), food products (such as wheat and edible oil) and semiconductors (such as palladium). These supply constraints are becoming increasingly difficult to resolve against the backdrop of a widening rift between Ukraine, backed by Western powers, and Russia, and China’s zero-tolerance approach to localised COVID-19 outbreaks. In the case of Ukraine and Russia, the more both sides harden their stance, the more difficult it would be to restore efficiencies in the future. In the case of China, concerns are that the longer China sticks to its zero-tolerance policy, the more difficult it would be for its citizens to achieve the immunity necessary to completely rid itself of the pandemic.

Certainly not a promising near-term prognosis for stocks

The bells are already ringing for equity markets, with most global equity indices in the correction zone (down more than 10% from their most recent peaks in late 2021/early 2022) and a few in the bear-market zone (more than a 20% decline from recent highs).

But longer-term gains are possible on equities during steady rate hikes

In addition to the narrower pockets of value outlined above, there is a broader silver lining to the cloud as well. Markets have a history of overcoming the initial hiccups and growing through longer periods of gradually increasing interest rates, as exemplified by the US (refer to Figure 3) — by far the largest constituent of any global index. Value realisation should not take long once banks and governments are able to collectively avert the prospect of extended stagflation and shift to a more predictable and moderate interest rate hike trajectory.



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Acuity Knowledge Partners

Acuity Knowledge Partners


We write about financial industry trends, the impact of regulatory changes and opinions on industry inflection points.