There’s been a lot of talk in recent months about the rising risk of inflation.
Just this week, Bain Capital’s Stephen Pagliuca warned that government stimulus programs and the Fed’s expansionary monetary policy will fuel inflation.
“If you look at all of the data points in any country in the last 100 years, when the money supply increases to that level you have got inflation 95%, 98% of the time within a year or two after those kinds of massive increases,” Pagliuca, the firm’s co-chairman of private equity, said. “I think there will be inflation.”
But even as pundits sound the alarm, legendary investor Richard Bernstein argues investors are in denial about the actual inflation risks.
“Think about what people love,” Bernstein, the CEO and CIO of Richard Bernstein Advisors and veteran of Merrill Lynch. “They love long-duration equities right now. That shows that people are kind of ill-prepared for this higher inflation.”
Bernstein noted that long-duration equities or growth stocks typically perform like the 30-year Treasury, which means they tend to be better investments during bearish economic outlooks. But economic growth is now on the rebound – and in a big way.
“When you start to see interest rates go up and you start to get people more optimistic on the economy, then those groups start underperforming,” Bernstein added. “What’s the probability we’re going to get higher inflation than people think? We think the probability of that happening is quite high.”
Despite that, the tech-heavy Nasdaq is up nearly 4.5% over the last month. And Bernstein argues big-name tech stocks won’t continue to outperform for long.
“The group as a whole, I think is ripe for underperformance,” he added. “The reason I say that is they are the safe havens. They proved to be the safe havens during the pandemic. They surprised a lot of people with that, myself probably included.”
So where should what corners of the market should investors consider instead? Bernstein says his top plays are energy, materials, industrials, regional banks, small caps, and commodity-related remerging markets given that they are undervalued.
“These are all the beneficiaries of kind of a pro-cyclical, pro-nominal growth,” Bernstein concluded. “Fundamentals are demonstrably improving.”