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Given that the much-anticipated surge in US inflation is not "transitory”, CGS-CIMB Research has revised its outlook on asset classes.
The brokerage has turned “overweight” on inflation hedged assets, such as gold, commodities and real estate.
On the other hand, it has downgraded equities to “neutral” from “overweight” previously, to reflect the rising risks.
It has also downgraded bonds to “underweight” as the corporate credit spread risk is overwhelmingly towards spread widening.
From a geographical perspective, the brokerage’s top picks are China, Indonesia, South Korea and Australia.
CGS-CIMB has also advised investors to be discriminative in emerging market (EM) assets given the varying degrees of success in pandemic control, inflation management and exposure to commodities.
According to CGS-CIMB, it would be “reckless” to dismiss the recent surge in inflation as inconsequential.
The brokerage warns that inflation has serious consequences for investments, living standards and political stability.
It notes that there has been a long history of linkages between periods of high monetary growth and high inflation.
“We have seen a period of the greatest monetary expansion in US history, and we do not think that it is over yet,” CGS-CIMB writes in a note dated June 1.
CGS-CIMB believes that several factors may push consumer prices much higher.
They include an unprecedented monetary expansion – abetted by sharply higher commodity prices – supply chain disruptions, and an ongoing trade war between the US and China.
