“As we look around, the economy is already starting to respond to tighter financial conditions, but no one really knows how far demand has to fall in order to bring inflation back down to comfortable levels,” Atluri said. “To my own view, I think inflation is likely to remain higher for longer than many think.”
For his investments, he said he’s cautious about adding too much risk until he’s confident inflation is actually coming down.
“It’s incredibly difficult to focus on any given sector when everything is just moving around so quickly,” he said.
So his team has taken the position of “gradual contrarians.” As the market began pricing in a more aggressive Fed and the economy showed signs of slowing a few weeks ago, he said, he began adding in duration to get close to a neutral position.
“We’re now a little bit overweight on the front end of the belly of the curve and a little bit underweight the back end of the curve, as we’re starting to see that tighter financial conditions and slowing growth is impacting the Fed’s hawkishness,” he said. “We continue to like TIPS here, but mostly just in the front end, to take advantage of our view that inflation will remain high and sticky for a little bit longer.”
He said he is cautious on long-duration TIPS because those are more dominated by changes in inflation expectations, which could happen a lot as the economy heads toward recession. Yet over the next few months he suggested investors should start looking at bonds to protect against equity volatility and to produce income.
For Wagner, who said she invests based on fundamental, bottom-up research, right now there are some promising investments to be made in businesses that have pricing power and where earnings cuts are less likely.
Included in that group are insurance companies, insurance brokers and health insurance companies, which can benefit from higher interest rates on their short-duration investment portfolios, she said.
She added she also loves beverage companies. “Unlike in foods, in beverages there really isn’t a store brand to trade down to, so these companies have more pricing power,” she said.
Similarly, she likes fast-food restaurants, where the company can pass inflation through the franchises and to which consumers flock when feeling pinched. In addition, these are companies that pay attractive dividends that have continued to grow at a healthy rate, she said.