And as central banks embark on an aggressive easing campaign, doubts arise about the effectiveness of a monetary response, both in terms of its ability to fight a pandemic and according to a preexisting opinion that the policy currency has dried up well. .
With bond yields already at record levels, one wonders how far they can go further, which could call into question the degree of negative correlation between bond and stock returns. But with stubbornly dormant inflation, it seems unlikely that bond yields could rise dramatically.
There are, however, arguments that inflation is an underestimated risk.
Inflation could emerge from a number of sources, even in an environment of headwinds.
Even before the emergence of the coronavirus, certain elements of the political landscape implied an increased risk of inflation. Governments are increasingly wary of a deregulation program. There is a process of de-globalization and re-regulation that has accompanied the rise of left and right populism in the developed world. Inflation can take root much more easily in such a world.
This process could be given new impetus if political authorities decide to adopt more unorthodox approaches to protect themselves against the risks of falling growth, such as (partial) monetary financing of budget deficits (as opposed to bond issue), which was reasonably common in a number of developed countries. until the early 80s.
A pandemic would represent a major supply shock resulting from the disruption of global supply chains which could also give a little boost to inflation.
Not that it can all happen quickly, but perhaps investors should now consider a wider range of uncorrelated sources of return in a portfolio, such as gold or absolute return type exposures given the growing uncertainties (not just the coronavirus) on the global economic outlook.
Stephen Miller is an investment strategy consultant at GSFM.