Why Central Banks Cannot Keep Buying Bonds

Any change to monetary policy treads a fine line between providing additional economic stimulus and raising concerns about inflation

Dan Kemp 2 November, 2016 | 2:18PM
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A compendium of economic news from 2016 would read more like a Harry Potter novel than a traditional text book; foreboding and mysterious but lacking a real crisis. Investors have had to contend with central banks using almost any measure to get things moving, inflation expectations see-sawing and a volatile commodity rebound. Then we have the added volatility from Brexit shocks and the rise of Donald Trump, both showing the public’s distaste for the status-quo.

In more recent weeks, we have witnessed a further shift in sentiment as concerns about deflation changed to worries about the concept of imported inflation, especially in the U.K. This makes a very interesting pretense, whereby a lower currency should mean more expensive imports, with the first clear signal evident by a cost pressure feud between Tesco (TSCO) and Unilever (ULVR) – aka Marmite-gate. This is supported by a recent uptick in headline inflation combined with a series of inflation expectation adjustments showing inflation is on its way.

From our view, this outlines the importance of owning investments with a strong moat. For example, our equities research team sees greater pricing power for Unilever as a producer rather than Tesco as the distributor, because predicting the short-term direction of inflation is a futile task.

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About Author

Dan Kemp

Dan Kemp  is Chief Investment Officer, Morningstar Investment Management EMEA