Asset owners and analysts in the Asia-Pacific region are expecting an ephemeral spike in inflation this year but gatekeepers warn that the potential for longer-term challenges should be shaping asset allocation decisions.
While it's far from a certainty, "we're definitely acknowledging the heightened risk of inflation over the medium term and we're advising clients to think about positioning for that," said Andrew Zurawski, associate director in Willis Towers Watson's research team in Hong Kong.
In the wake of last year's unprecedented monetary and fiscal policy response to the pandemic, the prospect of central bankers falling behind the curve in controlling inflationary pressures is "a risk that we can't be complacent about," agreed Cameron Systermans, senior portfolio manager and head of mainstream investments, Japan with Mercer Investments (Japan) Ltd.
And if inflation looks set to gather momentum across the globe this year, it's U.S. numbers that will be top of mind. "Definitely, we see the main risk in the U.S.," with the passage of its huge fiscal stimulus package at the start of the year and the Federal Reserve making it clear "they're happy to let inflation be above target for a period of time," Mr. Zurawski said.
"That's why we've changed our position from 'no, we're in a deflationary environment,' prior to COVID, to 'you need to think about the risks of inflation and here are some asset classes that can provide some hedge against that risk,'" he said.
A number of asset owners in the region predict only a short-term jump in inflation numbers as lockdowns come to an end this year, unleashing a wave of consumption that should temporarily lift goods prices well above last year's pandemic-depressed levels.
In the second quarter, U.S. consumer prices or producer prices could be up 4% year on year, but that should prove very temporary, falling back to more normal levels of around 2% by early next year, said Dong Hun Jang, chief investment officer of the 16.4 trillion won ($14.5 billion) Public Officials Benefit Association, Seoul.
But with monetary and fiscal policy in unchartered territory over the past year, some observers see room for missteps.