Billionaire investor Howard Marks says no one can know what will happen with inflation - so there's no need to make big portfolio changes

July 30, 2021

Billionaire investor Howard Marks says no one can know what will happen with inflation - so there's no need to make big portfolio changes

Howard Marks said he believes it's not possible to predict whether high inflation will persist.
Investors don't need to alter portfolios in response to macro forecasts, the Oaktree co-chief said in the Thursday memo.
The billionaire investor thinks current asset prices are fair, given interest rates are at their lowest level ever.
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Billionaire investor Howard Marks has underlined his conviction that it's not possible to know where inflation is headed, and said investors shouldn't upend their portfolios in response to the current stream of macro forecasts.

Investors have a great deal riding on the prospects for inflation, since a higher level leads to higher interest rates and lower asset values, the Oaktree Capital Management co-chairman said in his latest memo, published Thursday.

But as for whether the present high level of inflation is permanent or transitory, as the Federal Reserve believes, "it's impossible to know the answer," he said in the note on macro thinking.

"I consider anything anyone says today about inflation in the coming years to be Lipsitch's 'opinion or speculation'... or, as I'd say, 'guesswork,'" he said.

US consumer prices rose 0.9% in June, the fastest rate since the 1% increase in April 2008.

Marks, whose company is the largest investor in distressed securities across the world, doesn't think the high asset prices in today's market are absurd, given that interest rates are at their lowest in history.

"While the possibility of rising rates (and thus lower asset prices) troubles us all, I don't think it can be said that today's asset prices are irrational relative to rates," he said.

Marks said investors should give less weight to predictions around inflation, as little is known about what drives it or dampens it. That said, he acknowledged that "inflation and its impact on interest rates constitute the most important wildcards" for the market right now.

But since no one can confidently predict whether the economy is entering an inflationary era, there isn't much sense in significantly reducing market exposure, the Oaktree co-chief argued.

"I consider it reasonable for investors to give a nod to the possibility of higher inflation, but not to significantly invert asset allocations in response to macro expectations that may or may not prove accurate," Marks concluded.

For investors who do feel strongly about the risk of inflation, Marks suggested considering three areas - debt investments with floating rates, investing in businesses that can absorb cost increases (like some landlords), and deals where profits have the potential to rise faster than costs.

The billionaire also noted that investors should remember to stay fully invested for the long-run, "unless the evidence to the contrary is absolutely compelling."

Retail investors believe rising inflation poses the biggest threat to their portfolios, according to a recent survey conducted by brokerage firm eToro. Investors in the US, Poland, and Germany ranked it as a more prominent threat than those in the UK, the survey found.

Data showed that investors have moved to protect their portfolios by hedging with traditional picks such as real estate. Most portfolios were found to be made up of 62% in equities, 39% in bonds, and 28% in cash, eToro said.

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