Fundamentally, if you want to see the importance of ESG look around the world to see


what is happening. Carl Hitchman, Buck


how the company is aligning its strategy with the ongoing energy transition. If you are investing for 10 years plus you have to get it right in the first place, otherwise you may be forced to amend your exposure later on – likely at a wider spread and incurring transac- tion costs – which is not ideal for a buy-and-maintain portfolio.


PI: Inflationary fears have been rising. Do you expect that to continue, Jim? Cielinski: I do not see it dissipating, but markets have priced in a lot of inflation. In most developed markets we are looking at 2.5%, although the US’ longer term inflation expectations are slightly higher.


It is difficult, if you look at the last 30 or 40 years, to get meaning- fully above that. The inflation expectations have been behind the rate increases we have seen this year, although I am having a hard time expecting that to continue from those levels. That said, inflation will be higher in the next few months. Quoted inflation is done on a year-on-year basis, so we are moving into a period where we have pandemic-related deflation. Combine that with commodity prices and we are likely to see inflation numbers that look a lot worse than they have been. That does not lead to another round of inflation fears. I am more worried about the level of real rates and if global growth is strong enough to drive them higher.


10 May 2021 portfolio institutional roundtable: Fixed income


Martin: It is always right to consider how exposed you are to unex- pected inflation, either positive or negative, and have a scenario plan to see if your portfolio could withstand it or not. There is a pent-up demand for inflation protection from pension funds in the UK and that is not going away. The price of UK infla- tion will remain expensive given the demand and with clarification of the CPI changes, which will drive more trading because the uncertainty has gone.


It is, on a relative value basis, whether you are prepared to pay for inflation-linked gilts or areas that provide inflation within the assets, such as corporate linkers or housing associations. With my trustee hat on it is about de-risking. If you can take the risk off the table it is a price worth playing, but you can still play that journey sensibly. Hitchman: The risk of inflation has increased. The extent of the fis- cal stimulus pushes us into a different space in terms of: is a policy response going to help us through the crisis or stoke inflation? No one knows, is the frank answer.


Over the past 20 to 30 years there have been all sorts of reasons why inflation has been coming down and has been sticky. For example, there has been lots of discussion about the impact of demographic changes and whether the underlying dynamics are starting to change.


The market in the first quarter gave a taste of what could happen.


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