Investor bets on risky assets undermined by strike threats

While signs that inflation has peaked have fueled bets on everything from a weaker dollar to a rebound in global stocks this 2023, there is growing concern among some market strategists that a break in labor costs will hamper the flow of money from havens to assets that thrive in an economic boom.

Warning signs abound, with labor unrest rising in key economies. UK Border Force workers and railway staff launched new strikes last December which the Prime Minister’s spokesman Rishi Sunak said were causing “mass disorders”.

In a dispute in Germany, some 900,000 workers walked out in front of the country’s largest labor union and employers agreed to an 8.5% wage increase. South Korean truckers have disrupted the auto, petrochemical and steel industries. And the striking Starbucks baristas in Seattle have also grabbed the headlines.

Federal Reserve Chairman Jerome Powell and his European counterpart Christine Lagarde underscored the impact of labor costs after raising interest rates in December. “This is the ultimate battle of 2023: it is the labor force against those who pay the wages”said john vailchief global market strategist for Nikko Asset Management in Tokyo. “If the wage increases go through, it will be stagflationary and a headwind for the markets, both bonds and stocks”.

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“Higher rates for longer would potentially mean another rise in bond yields, which is bad news for investors in government bonds and subprime corporate debt.”said shane oliverhead of investment strategy and economics at AMP Services Ltd. in sydney.

“It perpetuates defensive trading and value trading. It would be a very negative environment for growth stocks.”said.

michael mullaneyhead of research Boston Partnersbelieves that shorter duration and more cyclical stocks will perform well if 2023 is a year of persistently high inflation.

“Stocks with long, long earnings distribution tails will continue to suffer in the higher interest rate scenario for longer”said mullaney. “Value stocks perform well and commodities play a role, whether they are material or industrial”.

1970 reduction

Cash would also find new appeal, according to vail from Nikkoreflecting a winning trade when the combination of inflation and low growth undermined markets nearly half a century ago.

“If you were investing in the late 1970s, it would have been best to put your money in a money market fund. Short-term interest rates rise in a stagflationary environment“, said vail.

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In his view, the case for putting money into physical commodities is a tougher call, as inflation tends to boost them while the weak economy undermines demand.

Strikes in the United States recorded by Bloomberg Law are reaching their highest point in 17 years.

Highlighting the stakes, US President Joe Biden used a law crafted before the Great Depression to prevent railroad workers from participating in a strike that would have cost the economy an estimated $2 billion a day. . The UK has even turned to the military to reduce disruption at airports caused by strikes.

The median forecast of Fed policymakers is for rates to rise next year and stay high before falling in 2024. However, the market price for interest rates fed and the ECB it is for cuts in the middle of the year.

central banks “they see the labor force as the hardest part of the inflation equation”said kristina hooperChief Investment Strategist at investcowho warned that workers have more influence on wage increases. “Now there is much more power and leverage due to very tight labor markets.”

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That doesn’t rule out the Fed allowing wages to soar if price increases in other areas like goods and housing start to slow, he added.

For Oliver from AMPa four-decade veteran of financial markets, the wave of worker unrest rekindles images of the 1980s pickets in the US, UK and Australia when workers revolted against economic liberalisation.

“It is possible that we have arrived at a world with more worker militancy”said. “This is bad news for investors because it would lengthen the period of high inflation”.