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US temporary inflation fund manager position

MUMBAI, Aug 12 (Reuters) – Based on expectations that U.S. inflation will be temporary and the Federal Reserve will clearly communicate its plans to curb bond purchases, major global fund managers say they will remain invested in risky assets.

Fund managers interviewed on Reuters Global Markets Forum since last week appeared to agree that the Fed may place more weight on employment data than on inflation, but had different views on when and how the Fed would announce a cut.

UBS Global Wealth Management positioned itself for some inflation, said Chief Investment Officer (CIO) Mark Haefele.

“It’s a bit of a barbell in the sense that we don’t think inflation is getting out of hand,” he added.

Haefele is banking on the reflation trade – trades that perform above average in times of rapid economic growth – while the world is working through the delta variant of the coronavirus. His investment recommendations include energy, financials and Japanese stocks.

Rahul Chaddha, global CIO at Mirae Asset Global Investments, suggested that deflation would likely be a bigger problem for the Fed in the medium term.

Wednesday’s data suggested that US inflation may have peaked, which could support the Fed’s claim that the price hike will only be temporary. Continue reading

The Fed will be “happy to live with periods of high inflation” to stimulate the investment cycle, Chaddha said.

Chaddha believes cyclical stocks could sell off if bond yields rise in the short term, but reflation trades would become more attractive in the medium term as the Fed caps yields and stays behind the curve.

TAPER TIMING

The biggest concerns for fund managers were about the Delta option and the impact of a slowdown in China.

“In 2016 we saw the impact the slowdown in Chinese growth can have on the rest of the world,” said Justin Onuekwusi, Head of Retail Multi-Asset Funds, Legal & General Investment Management. “Taper will be delayed.”

Haefele did not expect “tremendous clarity” from the Fed anytime soon, saying that the Fed’s average inflation target would give “more leeway” for indulgence.

However, Mark Konyn, CIO of the AIA group, expects the Fed to announce a throttle by November or December this year, based on comments from Chairman Jerome Powell about the underlying strength of the labor market.

“The Fed is facing some kind of ‘hard deadline’ to announce a throttle in 2021,” said Konyn.

A sharp fall in the US budget deficit will reduce government bond issuance, which could lead to market volatility if the Fed continues buying bonds at their current levels, Konyn added.

Jim Leaviss, CIO of public bonds at M&G Investments, expects the Fed to announce its taper plan earlier during its “live” meeting in September and begin cutting bond purchases by November this year. He has reduced the average maturity or duration of his holdings in US bonds.

(These interviews were conducted in the chat room of the Reuters Global Markets Forum on Refinitiv Messenger. Join GMF: https://refini.tv/33uoFoQ)

Reporting by Divya Chowdhury in Mumbai, Lisa Pauline Mattackal and Aaron Saldanha in Bengaluru; Editing by Vidya Ranganathan and Steve Orlofsky

Our Standards: The Thomson Reuters Trust Principles.

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