S&P/ASX 200 Index (ASX: XJO) investors are increasingly worried about rising inflation. But you shouldn't lose any sleep over it. At least, not yet.
Inflation, which was stubbornly absent over recent years, has been ticking up. Which shouldn't come as any surprise.
Not with global central banks ramping their quantitative easing (QE) programs to record levels and holding real interest rates near or below zero. All while developed nations are pouring trillions of dollars into their economies to prime them for their post COVID recoveries.
The latest mammoth stimulus package is set to launch in the United States. This after the US Senate passed President Joe Biden's US$1.9 trillion (AU$2.4 trillion) pandemic-relief bill.
Analysts have widely pointed the finger at this huge fiscal spending program for sending the yields on 10-year US Treasuries to a pre-pandemic 1.6%. But is this cause for share market investors to panic?
Janet Yellen confident on inflation control
Former Federal Reserve Chair and current US Treasury Secretary Janet Yellen stresses that developed nations had been trying to stoke inflation before the pandemic, when inflation was lower than desired.
Speaking on MSNBC, Yellen dismissed concerns that the new US stimulus package would drive inflation beyond target levels. She added, "If it turns out to be inflationary, there are tools to deal with that."
Tech shares hit as value and recovery shares gain
Rising yields combined with a glimmering light beckoning at the end of the pandemic tunnel has hit high growth tech shares hard, while value shares and recovery stocks have gone the other way.
Yesterday (overnight Aussie time) the Dow Jones Industrial Average (INDEXDJX: .DJI) closed for a record high. This as the tech laden Nasdaq-100 (INDEXNASDAQ: NDX) fell 3% by closing and officially entered correction territory (down more than 10%).
The same shift is playing out on the ASX. The S&P/ASX All Technology Index (ASX: XTX) down 1% today, is now down more than 17% since its 10 February high. In that same time the wider ASX 200 is only down 1%.
A share market attitude adjustment
Mike Bailey, director of research at FBB Capital Partners explains the diverging paths we're currently seeing between big tech shares and value shares. According to Bailey (quoted by Bloomberg):
Investors are feeling better about the recovery and looking to own improving fundamentals within large caps outside of tech and growth where valuations are more reasonable. The focus on better fundamentals at a reasonable price may be driving the Dow to new highs…
It feels like an attitude adjustment for tech and growth stocks. Investors have decided that these Covid winners just got too expensive and now it's time for a valuation haircut.
Separately, Bloomberg notes that, "Equity strategists are as bullish as ever, despite all the nervousness among investors about sky-high valuations and rising rates."
Abby Joseph Cohen is a senior investment strategist at Goldman Sachs. Speaking to Bloomberg TV, she said that while some shares may drop due to higher inflation and interest rates, other sectors will see strong rallies.
We are seeing this very significant rotation. We are seeing some movement now in those sectors that do better when we come out of lockdown, and the good news on the vaccine will be helpful.
Mislav Matejka, a strategist at JPMorgan Chase & Co, said that "airlines, hotels and auto suppliers are attractive, and investors should consider shorting online retail and technology".
ASX airline and hotel shares
If Matejka is right, then ASX 200 listed Qantas Airways Ltd (ASX: QAN) shares could be looking attractive.
The Qantas share price is up 2% today and up 5% in the past 5 days. By comparison the ASX All Tech index is down 6% over the past 5 days.
Pure ASX 200 listed hotel plays are harder to come by. But The Star Entertainment Group Ltd (ASX: SGR) comes pretty close. The company operates 3 hotel and casino complexes in Australia.
Star Entertainment shares are up 4% today and Star's share price is up 7% in the past 4 days.
