Our process often involves contrasting what the market thinks, and why, versus what we think, and why.
Sometimes, telling what the market thinks is pretty straightforward. Instead of back-solving expectations from market pricing, you have surveys, in which market participants just write down a number, about what they think will happen.
Now, those forecasts are often wrong. For all of the 2010-s the market expected a swift return to trend for interest rates. That meant a decent outlook for secular growth stocks, and also for holding duration in bonds, trades which worked out pretty well.
Now, however, the “hairy caterpillar” may yet be proven right. Rates are expected to rise, and we expect that too.
Likewise inflation estimates, in which transitory remained the most likely outcome, by forecast. And those forecasts have had to be revised upwards consistently.
We still think inflation will be transitory, however we are mindful to avoid stocks with what we regard as minimal pricing power (price takers, competitive markets).
Mostly, we do this by way of regression, working out each stock and sectors exposure to real rates delta, and breakeven’s beta.
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