IT’S accepted wisdom among investors that the low-inflation, low-interest rate environment of recent decades is over — and we must now contend with rising prices for a long period of time.
But senior fund manager Nudgem Richyal, who manages Pendal Global Select Fund alongside Chris Lees, thinks the wisdom is wrong.
“For a bunch of reasons — supply chains, China, the war in Ukraine — there’s been a short-term bump in inflation.
“But the big story that’s been pushed into the background is demographics. Developed nations are ageing. That hasn’t gone away.”
A book published two years ago by eminent economists Charles Goodhart and Manoj Pradhan has quickly become a seminal piece in the debate on inflation.
The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival focuses on demographics and the participation of China in the global economy.
It argues that these two dynamic forces over the past three decades led to deflationary forces that explain falling inflation and interest rates.
Pendal Global Select Fund
Something very different in global equities
Going forward, the two forces will operate in reverse, leading to growing inflation pressure, the economists write.
“Our view is the complete opposite,” Richyal says. “We think the ageing population is actually disinflationary, and Japan has shown that.”
Richyal uses an anecdote to explain the hypothesis.
“As people age, their desire for a bigger house decreases. In fact, people downsize. They go from a McMansion to a one-bedroom apartment, and that’s disinflationary.”
He argues that as people age, consumption drops.
“Their footprint decreases. The collapse in consumption and investment brings inflation down. And that’s the point Goodhart and Pradhan are missing.”
An ageing population will put price pressures in some parts of the economy, such as health care and social services, because consumption will increase.
But even in those areas, people are less able to spend as much as they get older, because incomes are lower and as people age, wealth decumulates, Richyal says.
Japan proves the point, Richyal argues. The country has one of the oldest populations in the developed world and has been operating in a very low inflationary environment for many years.
(Goodhart and Pradhan say Japan is an exception to their wisdom, but argue that during the past 40 years, globalisation of the labour force, the collapse of the Soviet Union, and the rise of China among other things, kept down price pressures.)
“Japan provides the empirical evidence. People provide excuses why Japan doesn’t count, but that is the empirical evidence.”
If the current bout of inflation is secondary to the demographics story, investors must rethink their short, medium and long-term strategies, Richyal says.
This has implications for healthcare, technology, real estate and all sectors of the economy.
“People don’t say inflation is transitory anymore. But we think of inflation as transitory over a secular span of time. And that’s because of demographics,” he says.
“Demographics will be disinflationary, not inflationary.”
Nudgem Richyal co-manages Pendal Global Select Fund with Chris Lees. The pair have been working together in global equities investing for more than 20 years.
Nudgem has 22 years of industry experience, joining J O Hambro Capital Management (a wholly owned subsidiary of Pendal Group) with Chris in 2008. He was previously an investment director with the Global Equity Group of Baring Asset Management, where he worked closely with Chris since 2001.
Pendal Global Select Fund is a global equities portfolio with a distinctive, yet proven approach and a 17-year track record of outperformance. Since its inception, the underlying strategy (JOHCM Global Select Fund) has delivered top-decile performance in Lipper and 2nd decile in Morningstar.*
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. Pendal Group includes Pendal Australia, J O Hambro Capital Management, Regnan and Thompson, Siegel and Walmsley (TSW).
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