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Liz Capo McCormick , Bloomberg News
BC-‘Barbell’-Trade-Lures-$121-Billion-Manager-With-Inflation-Wild-Card , Liz Capo McCormick
(Bloomberg) -- Thirty-year market veteran Matthew McLennan of First Eagle Investments was among those early on to warn that ultra easy monetary and fiscal policies would spark sky-high inflation. Now he has some hope that the worst is over -- but enough fear to bullet-proof his portfolios in case it’s not.
“We are in a moment when one has to be realistic and cautious,” McLennan said in an interview. “We’ve had a few hopeful inflation prints. But if we find inflation is more embedded, we could find ourselves in a stagflationary environment. So, the structure of our portfolios is somewhat of a barbell for most.”
The strategy involves a slew of wagers that benefit in case inflation stays high and also if it moderates, said the co-head of the global value team at First Eagle, which oversees $121 billion.
Betting price pressures would grow has aided the firm, with its flagship $45 billion First Eagle Global fund -- in the red this year, but performing better than 94% of its peers.
“We have some investments in areas that could have potential hedge value if inflation proves persistent,” including gold, energy and well-capitalized commercial real-estate, McLennan said.
The strategy also “includes the insurance companies we hold because if inflation becomes embedded, insurance claims’ costs go up and insurance pricing goes up,” he added.
US consumer prices rose 8.5% in the 12 months through July, down from the 9.1% increase in the year to June that had marked the highest inflation rate in four decades. A reading on the CPI’s pace in August will be released on Sept. 13.
The Federal Reserve’s aggressive tightening agenda has helped crimp demand and ease price pressures slightly, though it’s uncertain if inflation has peaked.
Read: Fed’s Mester Backs Rates Above 4% Early Next Year, No 2023 Cuts
Data Thursday showed manufacturing growth steadied in August at the slowest pace in over two years, while a measure of materials costs declined for a fifth-straight month -- a welcome sign that inflationary pressures are abating.
Traders are now anxiously awaiting the US jobs report Friday, with Minneapolis Fed President Neel Kashkari recently telling Bloomberg’s Odd Lots podcast he will be watching for signs of what is happening with wage growth while emphasizing his focus on inflation data when thinking about the September rate move.
The Fed raised the target range for its benchmark rate by 75 basis points in its two most-recent policy decisions, and traders give around 70% odds for another jumbo-sized hike when officials gather this month.
“On the other hand, we have a range of investments that would be beneficiaries of some commodity price pressures moderating if we get a more recessionary scenario,” McLennan said. “I’d include particularly in this bucket consumer staples. We also have other companies that have strong local-market positions so have the margin strength to endure cyclical downturns.”
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Canadian employment levels unexpectedly fell for a third straight month in August and the jobless rate jumped, a potential signal interest-rate hikes have started to cool the tight labour market.
Economists are warning Prime Minister Justin Trudeau’s government against using windfall revenue to add to spending amid concerns about inflation.
The latest jobs data from Statistics Canada shows one-out-of-10 Canadians plan to leave their job within the next 12 months.
As borrowers bemoan yet another massive interest-rate hike by the Bank of Canada, savers are getting a long overdue reward.