Thesis: Returns may be harder to come by as UK enters inflation ‘twilight zone’

Rising inflation, coupled with modest economic growth, means that returns for investors are not going to be available at the ‘runaway pace’ predicted by some, Giles Marriage, director of institutional sales at Thesis Asset Management has said.
Marriage believes the UK could enter an inflation ‘twilight zone’ between reflation and stagflation.
With the UK’s headline inflation rate reaching 1.8% in February, its highest level since June 2014, Marriage says economic activity will dictate how markets perform.
Given expectations for rising inflation going forward, it is important to ask what this could mean for markets,” Marriage said. “We are hopefully unlikely to fall into the circumstances that lead to the ‘Great Stagflation’ of the 1970s, where naive legislators, a combative OPEC and runaway inflation led to severe stock market declines.”
“Stagflation is difficult to resolve and in its most virulent form strikes fear into investors and policymakers alike. However, in periods of reflation growth-sensitive ‘cyclical’ sectors, such as basic materials and financials, are the biggest beneficiaries, while defensive sectors like utilities usually underperform.”
Marriage notes that economic activity does seem to be on an upwards trend, with underlying growth predicted to rise above long term averages in many global economies.
“‘Trumponomics’ (effectively meaningful fiscal stimulus together with tax and regulatory reform) is widely seen as a positive factor for growth, although this could change depending on how Mr. Trump’s protectionist policies come into force.
“Perhaps a third inflationary scenario is more likely to be realised, whereby we enter a twilight zone with reasonable inflation and modest economic growth. Returns may be available for investors, but perhaps not at the runaway pace predicted by some.
“Markets will clearly be subject to short term swings as political sentiment fluctuates and some rich valuations are likely to be re-evaluated.”