Page 11 - ISQ UK_October 2017

OCTOBER 2018

another bout of lacklustre performance by fixed interest assets. Additionally, patchy
productivity growth from many countries worldwide, which limits the ability to grow
in a non-inflationary manner, has been a notable feature of many central bank “Higher interest rates are
communications, including from the Bank of England. To improve this latter capability, typically not good for risk
we would need to continue to see supply-side change and reform which builds assets as it raises the hurdle for
flexibility and dynamism in underlying economies. companies to borrow money
or analysts to discount
EQUITIES investment opportunity.”
And what about the impact on global equity markets? Higher interest rates are
typically not good for risk assets as it raises the hurdle for companies to borrow
money or analysts to discount investment opportunity. This could, in particular,
impact the perception towards growth companies - including many companies in the
technology and internet-related sectors which have been extremely influential in
pushing up many global equity markets. A bit more inflation raises the likelihood of
rotation towards a broader range of sectors, and towards individual companies that
can exhibit pricing power. The latter trait is likely to be an increasingly important one
for all investors to look for when selecting individual equity investments.

THE IMPACT OF RAISING INTEREST RATES
Overall, in terms of concerns about inflation build - augmented by commodity shifts,
world trade disruption impacts and the capability to boost productivity via change
and reform - possibly the bigger impact will come from the impact on raising interest
rates, with direct knock-on effects for both equity and fixed income investments.
As an investor, inflation matters.

KEY TAKEAWAYS:
• Inflation has always mattered for investors.

• If inflation - or even inflationary expectations - rises, then interest
rates inexorably are likely to rise too.

• Other inflation indicators in the US are hotting up including mentions
in the influential Beige Book and in corporate quarterly earnings
transcripts.
• A bit more inflation raises the likelihood of rotation towards a broader
range of sectors and towards individual companies that can exhibit
pricing power.
• The biggest impact will come from the impact on raising interest
rates.

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