Equity -Inflation Hedge?
We have learnt at several places that one should buy equities as an inflation hedge !
But why it is not working this time ?
It seems to be we’re in a risk- off trade globally as of now .
The key reason is US Fed.
FED is fighting inflation not only by using interest rates but alsoby bringing the equity prices down .
Equity market is also being felt responsible for inflation in USA
One example is housing bubble in USA. The employees of the US tech companies and start-ups have seen their ESOPs going multifold and they were buying houses at any price ,not only for living but addtional houses as well as an investment as prices kept going up due to butterfly effect.This has put pressure on demad-supply gap and housing is becoming unaffordable for middle and lower strata of the society.
Lower prices of equity might have direct impact in controlling inflation at least in housing bubble.
Fed is trying to fight the inflation by raising interest rates as well as it wants people to support its bonds -market in wake of tussles with Russia and Chiana . And it is working as we can see in rising bond prices.
Last time when US Fed did not support the equity ,happened in 1929 - when FED never intervened in the falling markets.
But after that for last 70-80 years , Fed always intervened to support the market so people started taking it guaranteed.
There is still hope that FED may support it as lot pensioners invest in equity in USA - but current focus is on inflation- control as US have certain interim elections .
Keep in mind that we are a tiny player ( a fly ) in a global markets - and when a tide comes - a fly has to nowhere to go but to just go with the winds. Controlling inflation is the key driver for US regulators and we all are feeling the heat.
There are several other factors behind why equities as hedge are not working :
a) Inflated markets due to last 2 years bull run
b) RBI is also increasing interest rate to fight currency depereciation ( as they no longer have enough reserves to intervene the currency markets)
c) Worries about presssure on companies margin due to increasing raw-material prices.
d) Fear about decreasing demand due to increasing inflation and lingering COVID impact on lower income classes