Previously, I explained that the inflation we are currently seeing in the U.S. economy is not hyperinflation that many of you may have been thinking about; it is benign, long overdue, and cyclical. But it will most certainly affect the financial markets.

Rising inflation is only just beginning to be felt in the bond markets. Since 2009, when interest rates were slashed and fears of deflation were high, the bond markets had continued to provide good returns. These returns were increasingly driven by capital gains rather than yield, as the chart below illustrates.

In other words, bonds were behaving more like equities. Now that inflation is becoming more apparent, I believe that repricing in the bond market has only just begun.

Higher inflation also matters for equity returns. At a minimum, higher inflation implies higher interest rates, which influence the discount rate for future cash flows. In practical terms, we have already seen a rotation more toward “value” stocks, including cyclical sectors such as industrials and financials, which had underperformed for several years before 2016, making them relatively “cheap” or “value-like.”

In Europe and Japan, this rotation came in the second half of last year, but in all cases it was well advanced before the U.S. presidential election, as the chart below shows

The best growth companies have generally achieved a revenue growth premium of 15% versus the market over the past few years. The question has become, “What do you want to pay for that growth?” In an environment in which growth is scarce, the premium will rise significantly.

If growth is broadening, there should be more places to go. Our portfolio managers see this as a positive in that the available universe is expanding. As growth investors, we now get to play in a larger sand pit, and the premium we are paying for companies that are able to execute is markedly different.

 

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Please carefully consider the Funds’ investment objective, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus, which you may obtain by calling +1 800 742 7272. Read it carefully before you invest or send money. Investing includes the risk of loss.

Any statements or opinions expressed are those of the author as of the date of publication, are subject to change without notice as economic and markets conditions dictate, and may not reflect the opinions of other investment teams within William Blair Investment Management, LLC or the Investment Management Division of William Blair & Company, L.L.C.

This content is for informational and educational purposes only and not intended as investment advice or a recommendation to buy or sell any security. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions.

Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

Distributed by William Blair & Company, L.L.C., member FINRA/SIPC.

Copyright © 2017 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

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RSS FEED

Please carefully consider the Funds’ investment objective, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus, which you may obtain by calling +1 800 742 7272. Read it carefully before you invest or send money. Investing includes the risk of loss.

Any statements or opinions expressed are those of the author as of the date of publication, are subject to change without notice as economic and markets conditions dictate, and may not reflect the opinions of other investment teams within William Blair Investment Management, LLC or the Investment Management Division of William Blair & Company, L.L.C.

This content is for informational and educational purposes only and not intended as investment advice or a recommendation to buy or sell any security. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions.

Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

Distributed by William Blair & Company, L.L.C., member FINRA/SIPC.

Copyright © 2017 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

Statement of Financial Condition | NMS Rule 605 & 606 | Business Continuity Plan | UK Stewardship Code
Cookie Policy | Social Media Disclaimer | Privacy & Security | FINRA’s BrokerCheck

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