The inflation conundrum and private equity party

Wages have not cooled a lot in the Eurozone and the demographics mean that labour market could remain much tighter for much longer than what the ECB is expecting. Combining this with stronger commodity markets and the rebound in the economy and you have a potential dangerous cocktail for inflation if the ECB is also loosening financial conditions. To top it all, the geopolitics will add to inflationary pressures through two channels:

1. European finance ministers called G7 nations on Friday to stay united on the view that China is undermining market based economies with their trade practices. As we have said for some time. The harder China pushes on the export string to resolve their economic problems the bigger the pushback will be leading to tariffs and more reshoring of manufacturing pushing up goods inflation over time.
   
   
2. The war in Ukraine and the wider conflict with Russia will push EU countries to go beyond the fiscal constraints to ramp up military spending without sacrificing general welfare spending. This will be inflationary as it increases the investment rate in Europe and drives up demand for workers and raw materials.

Private equity is the thriving despite elevated interest rates

Last week’s surprise upside to UK inflation and repricing of monetary policy delivered a blow to bond markets declining across the board. The biggest casualties however were real estate and gold declining 2.6% and 2.9% respectively. Emerging market equities also did not like this outlook of high interest rates for longer declining 1.5%.

The top performing asset class was listed private equity up 1.3% extending the year-to-date performance to 14.6% only surpassed by gold. Private equity has historically been thriving on low interest rates and as such one would have believed that high interest rates would be bad for private equity. But as the one-year performance shows, private equity has been the best performing asset class over the past year up 51.4%.

The biggest constituent in the listed private equity index is British 3i Group which reported results earlier this month highlighting strong performance with its portfolio company Action delivering strong annual growth of 28% and like-for-like growth of 17% which quite impressive for an European retailer. Action is the fastest growing non-food discounter in Europe with more than 2,300 stores and €8bn in revenue. We highlighting 3i Group and its investment in Action, because it can sometimes be difficult to understand what investors are actually getting exposure to when investing in listed private equity. But essentially, investors are getting exposure to companies in various industries and the bet the investor is taking is that these private equity firms are able to deliver a return that is higher than that in public markets.