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Wellington investor survey: The bears ponder whether inflation will be too hot, too cold or just right

Ben Cooper, CFA, Director of Multi-Asset Research
Juhi Dhawan, PhD, Macro Strategist
2024-03-31
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Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.

The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.

Our quarterly survey of Wellington investors often pinpoints where the firm’s views differ from consensus and can also reveal important shifts in our investors’ collective thinking. In the latest survey, carried out on February 20 – 24, before the collapse of Silicon Valley Bank, participants were asked how bullish they were and how bullish they think consensus sentiment was towards risk assets.

The results reveal that our investors viewed market sentiment as the most bullish since January 2022. Wellington sentiment, however, was more cautious, with a majority of respondents thinking that inflation consensus is wrong and, by implication, that a soft-landing scenario, in which the US Federal Reserve (Fed) is able to engineer a return to target inflation without derailing the economy, is unlikely to occur. These more bearish investors fell into two camps: an “inflation will run too cool” camp, which reflects the view that the Fed has been engaging in one of the largest and fastest tightening cycles in history, and an “inflation will run too hot” camp, which reflects a belief that the Fed has not done enough to tame structurally higher inflation.

Figure 1
debt-and-dysfunction-in-washington-the-us-hits-the-ceiling-again-fig1

Elsewhere in the survey, the view that inflation and growth patterns are likely to be structurally different may explain why our survey participants expect Japanese bond yields to exceed consensus expectations. Participants’ much higher conviction in emerging market equities is a noteworthy change, with a majority expecting them to outperform US equities (S&P 500 Index) in US-dollar terms. Wellington investors were also significantly more bullish on Chinese high-yield credit on the back of China’s reopening.

Superforecasting in practice

We have been running our recurring macro survey for the last seven years and, reassuringly, the collective wisdom of Wellington captured by this survey has achieved a good hit rate to date for its forecasts as well as respectable Brier scores, which measure the accuracy of probabilistic predictions.

The idea for the survey originated from a conversation three of our macro thinkers had over six years ago about Philip Tetlock and Dan Gardner’s book Superforecasting. Tetlock and Gardner argue that forecasting is a skill that can be improved, and we thought their theory could work well in practice at Wellington, given the firm’s collaborative culture. The hope was to sharpen our collective and individual forecasting skills, enhance our internal investment dialogue, reveal where our views differ from the market consensus and identify how they change over time. The resulting internal survey gathers the anonymous responses of macro-minded investors across all disciplines, asset classes and office locations. The formulation of the questions is important. Wherever possible, our questions aim to be precise, time-bound, measurable, probabilistic and rollable from one quarter to the next so as to give us a richer data set over time. As exemplified by this quarter’s survey results about risk sentiment, the results can pinpoint where the firm’s views differ from the consensus and can also reveal important shifts in our collective thinking.

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