Neal says the macro environment was fairly challenging and “difficult to get (one’s) head around” even before the pandemic – citing the unusual parameters of high debt levels and close to zero interest rates.
“Then we had a pandemic and all the effects that that’s created and now these geopolitical concerns. So it’s a very complicated picture.”
‘But is this the time we want to bring economic activity down? It raises that terrifying prospect of a stagflationary environment.’
David Neal, IFM Investors CEO
“I do worry about inflation. There is obviously the demand boom from all of the policy stimulus colliding with the supply challenges from the pandemic that were already kicking off inflation. So then add to that a $US100 plus oil price that has arisen from this tragedy in the Ukraine.”
He notes that central banks have the opportunity to curb inflation, and monetary tools are more effective as a result of the high levels of debt around the world and that it probably wouldn’t take as much of an increase in interest rates as it once did to bring activity down.
“But is this the time we want to bring economic activity down? It raises that terrifying prospect of a stagflationary environment.
“I am not saying that that’s where we are going, but there is a heightened risk of it.”
Looking at the prospects through a short to medium term lens, the supply shocks will abate somewhat when the Ukraine conflict ends and COVID becomes a bad memory.
It is the most lasting effects that the world economy will need to deal with, of which Neal ranks de-globalisation at the top.
The sovereign desire for resilience and self-reliance over production and supply chains is a new feature spurred by COVID and the uncertain geopolitical environment. This, Neal says, is inherently inflationary.
Neal joins the recent chorus of experts who believe this will give further thrust to the decarbonisation push as countries seek to reduce their dependence on oil producing countries.
And it is these tectonic shifts that are important to IFM which has a long-term investment horizon.
Needless to say, Neal’s team wouldn’t be enjoying the extreme equity market roller-coaster but it does derive comfort from its heavy skew to critical infrastructure – an asset class that is relatively more protected during inflationary periods.
“I am a bit hesitant to say that because it feels a little bit like we are celebrating our good fortune from this terrible crisis and I don’t think that’s a good thing to do at all,” he says.
When the COVID cloud finally lifts, IFM, which was the largest investor in the consortium that bid for Sydney Airports, is confident that air traffic will bounce back.
But in terms of the broader industry returns, Neal says the phenomenal returns that investors have experienced over a very long period will be difficult to match.
Investors, he believes, will have to adjust their expectations.
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