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‘Inflation could destroy today’s darlings’: An equities chief overseeing $7.5 billion has been preparing for inflation since June. Here’s his playbook and 2 sectors set to surge


Traders work on the floor of the New York Stock Exchange during the afternoon

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This time last year John Bennett, director of European equities for Janus Henderson, made a big call – one that helped propel him into Insider’s list of top European fund managers in 2020.

“Basically, we said ‘let’s buy the industrials because there’s going to be a recovery,'” said Bennett, in a May 13 interview.

Bennett, who oversees around $7.5 billion in assets, managed to navigate a challenging environment in which the European market was significantly lagging relative to the US and yet he still managed to outperform across a range of his funds.

In the closing weeks of 2020, he made another big call by positioning for a consumer recovery when the timing of the reopening was still very uncertain.

“It’s game-on for a consumer boom actually led by the UK and the US,” Bennett said.

With a prospective explosion in consumer activity in mind, Bennett began preparing his portfolios last June for an expected pick-up in inflation, based on the monetary and fiscal responses to the pandemic.

“There’s a decent chance here of something that the world is not expecting and the world is actually not used to in the last 10 or more years,” Bennett told clients last year. “And that is inflation.”

Investors are increasingly becoming concerned about inflation following significant increases seen in both the April and May US Consumer Price Index, The 5% annual rise in the May Consumer Price Index is the biggest increase since 2008. 

A regime change

The Federal Reserve has said on numerous occasions it expects this rise in inflation to be temporary. But if it sticks, it could bring a major regime change, Bennett said.

“Inflation destroys high-multiple stocks,” Bennett said. “It destroys today’s darlings. It destroys the NASDAQ, it destroys tech stocks.”

There’s a whole generation of fund managers that don’t know what inflation looks like, Bennett said. “They only know rising PE’s and falling bond yields,” he added.

Morgan Stanley chief US equity strategist Mike Wilson recently said investors were not paying enough attention to the supply shortages in the market, adding that he believes the stock market could correct between 10% to 20% this year.

“It is normal to have at least one 10% correction in equities; it’s what they do,” Bennett said. “For more than one year period, 20% is normal. It’s just normal, it’s what they do. People have forgotten that as well. I think there’s a decent chance of more of a correction.”

The inflation playbook

Inflation coming into the system will create an enormous gear change for leadership in financial markets, Bennett said. If investors continue to shift out of those expensive growth stocks, such as technology shares, and into more economically sensitive “value” stocks, this broader market correction could be even steeper, he said.

Once inflation enters the system, then bond yields must move higher to compensate fixed-income investors for the hit to their returns, Bennett said.

“You will have Europe outperforming America, equities outperforming bonds, value outperforming growth and not for anywhere between 10 and 20 years are people used …read more

Source:: Business Insider

      

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