Rising inflation risks hurting today’s strong asset prices, if it outpaces central banks and jeopardises their ‘global experiment’ of record-low interest rates, a fund manager has cautioned.

Speaking to Reach Markets subscribers, Pengana Capital Management senior fund manager Ed Prendergast likened historically low interest rates to a drug and pointed to rate decreases in 2019 – when markets were “not struggling at all” – as signs of addiction.

“Last year, if someone had said to you in March ‘don’t worry, equity markets will be up 80% from the lows’ you would have laughed them out of the building, but it happened,” he said.

“It primarily happened because of interest rates. Term deposits roll off at 0.4 of a percent now, and all of those sovereign investors and insurance companies that have ever expanding liabilities need to grow their assets and they can’t do it in cash or bonds any more, so they shift in to property and shares and they’re all crowding and chasing, hence the rally.”

While Mr Prendergast expects we will remain in a low interest rate environment for “a long, long time”, he added it “makes me slightly uneasy” that a quick pick up in inflation could pull the rug out from under markets.

“If the Fed and central banks can control interest rates – as they’ve proven – in any environment except if inflation runs away from them, then that’s the only environment where they lose control over the interest rate cycle,” he said.

“If they lose control – what happens? If inflation really does kick up and the bond markets react, then the funding for the banking system is taken away from central banks and we’re getting spreads that are increasing really quickly.

“It’s a risk to every stock we own, it’s a risk to every asset that everyone on this call owns apart from maybe a few, gold you could argue maybe.”

Mr Prendergast recently presented at our fortnightly ‘The Insider: Meet the Fund Manager’ session. You can watch a recording of the full session below, or you can click here to book into our next installment ofthe series.

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