Asset allocation – Cover story


At the root of this ambivalent investment outlook is uncertainty about inflation. The Bank of England and the Fed have stressed that they expect the cost of goods and services to fall, but that further rate hikes might be required to achieve it. Markets appear to have swallowed the good news in this mes- sage, that inflation could fall, without considering the words of caution about future rate hikes. As recently as January, markets priced in that US Federal Reserve rates could peak in March. This has now been adjusted somewhat, amid a strong job mar- ket and news that inflation in February shrank slower than anticipated.


Nevertheless, futures pricing suggests investors believe rate hikes could peak this summer. Are they being too optimistic? For institutional investors having to reposition their asset allo- cation for the long term, what will happen to inflation and, in turn, to interest rates has now become the all-important gamble.


The inflation issue Richard Tomlinson, chief investment officer of Local Pensions Partnership Investments (LPPI), confirms that investors must navigate two potentially different outcomes. “The conversa-


ASSETS FOR A NEW ERA Issue 121 | March 2023 | portfolio institutional | 17


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