Wall Street pros think there’s more inflation pain ahead — and reveal how to trade it

Wall Street is rife with predictions on whether inflation has peaked following yet another red-hot reading in June. But some market watchers believe investors should look beyond calling the peak and buckle in for more pain ahead on the inflation front. Oil and food prices have come under sustained upward pressure in recent months amid a pick-up in economic activity and the war in Ukraine. But several analysts are now pointing to the drop-off in oil prices as well as the recent Russia-Ukraine deal to ease exports of grain as signs that inflationary tailwinds in commodities could be easing. “Inflation is likely to remain a real problem until year end, whether June is the peak or not,” Sunaina Sinha Haldea, global head of private capital advisory at Raymond James , told CNBC on Monday. With inflation still “way too high for anyone’s comfort,” Haldea sees no quick return to a low inflation environment, with any sustained drop-off in consumer prices likely to take several quarters to play out. Morgan Stanley too, sees core inflation staying “higher for longer” — even as the bank predicts that headline inflation has peaked in June. “Inflation has continued to surprise to the upside in recent months, and inflationary pressures have been more persistent than expected. Although June likely marks the peak in headline inflation, price pressures will likely remain very elevated through the end of 2022,” Morgan Stanley’s chief U.S. economist Ellen Zentner wrote in a research note on Jul. 25. Bank of America has painted an even grimmer picture. “With each passing month, the underlying inflation picture is getting worse. Over time, a combination of new shocks and greater persistence in old shocks has forced us and the consensus to repeatedly revise up our global inflation forecast,” the bank’s global economist Ethan Harris said on Jul. 22. The bank has raised its global inflation forecasts, with inflation now expected to come in at 8.4% and 5.8% for 2022 and 2023, respectively. How to trade it Against this backdrop, Haldea of Raymond James believes diversification is “critical” to investors’ portfolios. “[With] falling growth and a rising inflation environment, [investors] need to balance the portfolio through difference between inflation indexed bonds and nominal bonds, as well as certain emerging markets that can provide diversification, real assets and private equity exposure,” she said. She noted that it is “not time yet” to go long stocks, given “still inflated” multiples and continued “high volatility.” Instead, she advises investors to put their money in dividend paying stocks via exchange-traded funds. “Buy them in a diversified way and hold them for the longer term. This story is not going to be over quickly, so if you don’t have those in your portfolio, you should,” she said. Haldea also likes companies “with an infrastructure basis,” such as Caterpillar and John Deere . “They have a real economy [and] real asset backing, which is an inflationary hedge in this environment,” she added. Lastly, she believes investors should allocate a bigger portion of their portfolio to gain exposure to private markets through the permanent capital vehicles of large private equity firms. Permanent capital is typically investment funds that do not have a set timetable for investor returns. Read more ‘Awful for Asia’: Bank of America names the global stocks to ‘survive’ a U.S. recession Electric vehicles are disrupting this $255 billion sector. Here are the stocks to cash in: UBS ‘Huge’ cash generators: Analyst names the stocks to buy right now Morgan Stanley also named a “global shopping list” of “deflation enablers” to counter what it described as “persistent” inflation. These stocks produce cost savings in an environment of rising costs, according to the bank. “Cost pressures should make companies accelerate investments in automation and productivity-enhancing technologies. Many of these technologies are inherently deflationary,” Morgan Stanley’s analysts, led by Joshua Pokrzywinski, said in a research note on Jul. 20. Within the auto and mobility industry, electric vehicle giant Tesla and freight transportation firms XPO and ArcBest are among the best positioned for this shift, Pokrzywinski added. In the energy space, Morgan Stanley believes companies with deflationary clean energy technologies and high barriers to entry will be able to grow rapidly and generate increasing margins. Its top picks in this space include hydrogen fuel-cell makers Plug Power and solar installer Sunrun . Software names could also benefit from this deflationary trend as more companies upgrade their infrastructure to lower costs and improve productivity, it said. The bank’s picks include Salesforce , ServiceNow , Autodesk and Microsoft.