Most Central Banks Seen as Behind the Curve in Global Survey

Ven Ram and Eddie van der Walt, Bloomberg News

The Bank of England (BOE) in the City of London, U.K., on Thursday, March 17, 2022. The Bank of England, the first among major central banks to tighten monetary policy after the pandemic, looks all but certain to reach another milestone on Thursday by taking interest rates back to their pre-Covid level. , Bloomberg

(Bloomberg) -- It’s official: investors reckon that central banks are behind the curve on battling inflation -- and that value stocks provide the best hedge against rising prices.

Of 886 investors who took part in MLIV’s inaugural weekly survey, 73% voted that either “all” or “most” monetary authorities in developed markets haven’t done enough to quell inflation. While headline U.S. inflation has run way above 2% for a year now, the Federal Reserve was purchasing bonds until recently and raised rates for the first time this cycle only last week.

An additional 21% of respondents said only “some” central banks are behind the curve, which may be an acknowledgment that those in New Zealand and Norway have long been raising rates without any fuss.

In the U.K., the Bank of England’s benchmark is now what it was before the pandemic started. However, inflation is running around 8% and may well exceed 10%, a throwback to the era of Margaret Thatcher. And yet, the BOE keeps reiterating that it foresees only modest tightening -- causing inflation expectations to rise further and compelling investors to search for effective hedges on the chance it may fail to prevent spiraling prices.

Value Play

Talking of hedges, value stocks were the top pick to insulate a portfolio against the corrosive effects of price rises -- garnering 35% of the vote -- with gold and inflation-linked bonds as distant runners-up.

That preference for value stocks over linkers may stem from the putative ability of companies -- especially those with strong brands -- to pass on cost increases to customers. While inflation-linked bonds also provide an effective hedge, value stocks don’t compel investors to pick a tenor.

However, inflation hedging preferences vary by region. European investors are less likely to prefer value stocks than their U.S. counterparts. About 24% of European respondents named them as the best hedge, compared to 39% of U.S. and Canadian respondents.

Europeans were more apt to choose gold and oil compared to U.S. peers. One reason why value stocks may be more preferred in North America is the higher percentage of retail investors there who participated in the survey.

Unloved Bitcoin

Just 4% of respondents said Bitcoin offers the best inflation hedge, ranking last in a field that included value stocks, gold, inflation-linked bonds, oil and unspecified other assets. Those who picked the largest cryptocurrency were about evenly split between market professionals and individual investors.

The results undermine the idea that Bitcoin is perceived as a popular haven from inflation eroding the real value of fiat currencies.

War Concern

Not surprisingly, the conflict in Ukraine was at the top of investor concerns. Together, “war” and “Ukraine” were mentioned almost 200 times in answers to the question “What do you consider to be the biggest unpriced risk for asset prices?,” while China, inflation and recession were the other big worries. In a prior survey in December, inflation and Covid were the top concerns. The latter is glaring by its absence this time.

The Markets Live team’s weekly survey ran from March 15 to March 18, promoted via the Markets Live blog, Bloomberg News stories and the Five Things newsletter. To participate in this week’s survey, focused on stagflation, click here.

For more markets analysis, see the MLIV blog.