Jupiter's Bonham Carter: Inflation Needs To Behave

Edward Bonham Carter is vice-chairman of Jupiter AM

Edward Bonham Carter is vice-chairman of Jupiter AM

Edward Bonham Carter, vice-chairman of Jupiter Asset Management, has said the outlook for inflation will be a key concern going into next year, as there is a "question mark over how long wage growth can remain subdued" in some developed markets.

In his outlook for 2018 commentary, Bonham Carter said market behaviour will continue to puzzle economists and investors in 2018.

He said: "Economic growth though is likely to remain supportive for markets in 2018, with developed economies famously enjoying a Goldilocks moment.

However, he added growth is not strong enough to stoke inflation, but also not too weak to see unemployment rise.

Bonham Carter: Politics, the uninvited guest claiming its place at the top table

"The outlook for inflation is likely to remain a source of concern in 2018," he said. "There is a question mark over how long wage growth can remain subdued in countries like the UK and the US, with labour markets being so tight."

"Chatter around the breakdown of the Phillips Curve - the famous economic concept developed by UK economist A.W. Phillips that says low unemployment inevitably places pressure on wages and inflation - is likely to continue."

While some may argue the Phillips Curve is no longer relevant thanks to globalisation and technology, Bonham Carter argued it is still in operation.

When inflation strikes, where can investors take advantage?

He said: "Labour's bargaining power on wages is much less strong than in previous cycles as people are effectively importing cheap labour as they buy increasing amounts of products online that have been manufactured abroad in low wage countries.

"Technological innovation meanwhile continues to make inroads into all areas of the global economy, capping or driving down the prices of goods and services.

"Should inflation pick up, we can expect the US Federal Reserve and other central banks to quicken the pace of interest rate rises." 

Rising interest rates

In this case, Bonham Carter highlighted a rising interest rate environment would favour stocks over bonds, but market confidence may be "shaken" as higher rates lift credit default rates, send companies and individuals into bankruptcy and act as a break on economic growth.

He added: "For so long the price of risk has been distorted by central banks cutting rates and using bond buying programmes to boost growth; any attempt to bring back rates to their historical averages may prove painful, especially if it is done too quickly.

"Given how long rates have been kept low, when we talk about a reversion to the mean, the question remains what ‘mean' do we mean? Do we take a 10-year, 20-year historical average, or do we go even further back? Another conundrum for 2018. 

Potential correction

Commenting on the continuation of trends from this year, Bonham Carter added the combination of 2017's troubling (and largely geopolitical) news headlines and high valuations could lead to a market correction.

"This makes this stockmarket rally, in my view, a mirthless one, and potentially one that is ripe for correction," he said. "There is a sense the party cannot go on for much longer, and market talk of a pullback is common.

"We have heard these siren calls before, especially from those who are underinvested in the current rally and are looking for a sell-off to jump in, but this time, arguably, there is greater reason to think it might actually occur."

About the author

Jayna is senior reporter and investment trust correspondent at Investment Week. She joined the publication in August 2015 after graduating with an MA in Multimedia Journalism from the University of Kent.

Jayna holds the NCTJ diploma and has experience in print, online and broadcast journalism. She regularly contributes towards the Investment Week monthly podcast.

Read more on Jayna

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