Inflation in focus

The first quarter of 2021 saw inflation become the hot topic for investors

The rollout of COVID-19 vaccines boosted hopes for a return to a new ‘normal’ of economic and social activity. In turn, this encouraged a reassessment of government and central bank policy accommodation, including their impact for inflation and interest rates. This matters as expectations ultimately bear down on both the absolute and relative attraction of equities, government bonds, cash and everything in between.

That a debate around inflation is happening at all is significant, and markets responded with a swift recalibration; longer-term inflation expectations saw a further recovery from the end of 2020 alongside a rise in longer-term government 10-year ‘benchmark’ bond yields.

The inflation debate is likely to continue, and no one has a crystal ball. However, given the need to support the global economic recovery, with policy makers expected to keep borrowing costs contained, it is very likely that the relative yield attraction for equity earnings yields over government bond yields will continue to be an enduring theme for 2021.

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