Cracking the code on inflation

Jeff Benjamin [00:00:03] Hey, folks. How you doing, my name is Jeff Benjamin, and this is Three Questions. Today we’re talking to Nadia Papagiannis, who leads the model portfolio efforts at Northern Trust Asset Management. How are you doing today, Nadia? 

Nadia Papagiannis [00:00:16] I’m doing great, Jeff. How are you? 

Jeff Benjamin [00:00:18] I’m doing well. Thank you and thank you for being here. We’re talking inflation. All right. That’s what is on the top of a lot of people’s minds right now, and we’re going to see if Nadia has got some ways to to help us through this. First of all, Nadia, why do you believe inflation has remained so stubbornly high over these past several months? 

Nadia Papagiannis [00:00:37] It’s important to remember that inflation actually first went down during the brunt of the COVID pandemic. So of course, as economies opened up pent up demand for goods and services increased, so increased demand. And then, of course, we had the infamous supply chain shocks. So increased demand decreased supply that increases inflation. And all of that was before the war in the Ukraine, which is of course, having an impact on prices of energy and the supply of energy and supply and prices of agriculture and war in and of itself is inflationary. 

Jeff Benjamin [00:01:10] OK. Today is St. Patty’s Day, and yesterday the Federal Reserve hiked rates by a quarter point, which was widely expected. They said that they plan to hike maybe six more times this year. Do you think the Fed will be able to manage inflation and we’re in a 40 year high here. 

Nadia Papagiannis [00:01:28] The Fed can try to manage inflation, but they have a limited ability, and that’s because they really can’t influence the long end of the yield curve, which is of course, affected by buying and selling of bonds in the market. And that long end has remained pretty stubbornly low. And so if the Fed raises rates too far too fast, they can risk inverting the yield curve, which is, of course, recessionary, and that is something they don’t want to tread on. 

Jeff Benjamin [00:01:52] If the government can’t help us, what can we do as investors to protect our portfolios against inflation, maybe in an multiasset portfolio 

Nadia Papagiannis [00:02:01] At Northern Trust, Jeff we always think about inflation in our portfolios? And that’s because of our wealth management history and wealth management clientele. Just to give you an example for an investor that’s 10 years out from retirement, if inflation just increases by one percent, which is just normal inflation, his or her spending power in retirement can decrease by 14 percent. And that’s just a normal inflation time. So we always think about inflation and we do it in three ways in our portfolio. First, value stocks versus growth stocks. Value stocks do better in a rising rate inflationary environment, but also over the long term, value stocks do better than growth. Secondly, we always have real assets in our portfolio, particularly natural resources. Natural resources stocks are a good hedge against inflation in high inflationary times, and they’re also a good hedge against geopolitical risk because, for example, or war increases the price of energy typically. And lastly, in the risk control part of your portfolio, we’re using shorter duration TIPS, which are less sensitive to rising interest rates, and we’re using actively managed investment grade bonds. And this is because the interest rate market environment is so volatile right now, it’s important to have experts knowing how much credit risk to take and how much interest rate risk to take at any point in time in your investment grade plans. 

Jeff Benjamin [00:03:23] Well, there you have it, folks. Some great ways to navigate inflation because as Nadia Papagiannis of Northern Trust Asset Management, just told us, we’re probably going to be dealing with it for a while. Thanks a lot, Nadia. 

Nadia Papagiannis [00:03:35] Thank you, Jeff.