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What are Inflation Expectations Really...

What are Inflation Expectations Really Telling Us?

Small Mid Cap Core Review of the Second Quarter of 2021 | KayneCast 156

July 13, 2021

It was, no doubt, another solid quarter for the equity markets. But what does Small Mid Cap Core portfolio manager and senior analyst Julie Kutasov think of one significant development during the quarter — the flattening of the yield curve? 

“I think this fooled the Fed at its June meeting. Historically yield curve flattening signals an economic slowdown or deflationary pressures. Under the current robust inflation scenario, however, I think it’s merely telling us that the hyper-pace of post-pandemic growth is unsustainable, and we’ll soon return to a steady state.”

That said, the second-quarter performance took place against the backdrop of significant inflationary pressures on input costs of raw materials and labor. Although these pressures tend to favor high-quality companies that can more easily pass these costs on to their customers in the form of higher prices, the Russell 2500 benchmark still favored names with lower earnings and quality, higher financial leverage and high volatility — not the most favorable environment for high-quality portfolios like KAR’s Small Mid Cap Core.

Key Contributors and Detractors in Small Mid Cap Core

To learn more about the top 5 contributors and detractors in KAR’s Small Cap Core strategy for Q2 2021 listen to the podcast above. 

Second Half of 2021 — What’s Really Important?

Pandemic?

Entering the second half of the year Kutasov is confident but cautious as COVID-19 has proven to be an unpredictable enemy.

Inflation? 

She believes one can discuss the outlook today without touching on the interest rate environment and inflation expectations. KAR’s Small Mid Cap Core portfolio aims to steer away from capital-intensive and direct commodity exposures, and the leading market positioning of its companies gives them solid pricing power to survive inflation. 

“We think of ourselves as investors in businesses rather than investors in stocks, so we continue to do what we have always done — look for differentiated, protectable businesses. Self-funding entities produce a superior chance of capital from under-leveraged balance sheets, and that’s an attractive set of characteristics which is certainly relevant today.”

DISCLOSURE

This information is being provided by Kayne Anderson Rudnick Investment Management, LLC (“KAR”) for illustrative purposes only. Information contained in this material is not intended by KAR to be interpreted as investment advice, a recommendation or solicitation to purchase securities, or a recommendation of a particular course of action and has not been updated since the date of the material, and KAR does not undertake to update the information presented should it change. This information is based on KAR’s opinions at the time of the recording of this material and are subject to change based on market activity. There is no guarantee that any forecasts made will come to pass. KAR makes no warranty as to the accuracy or reliability of the information contained herein.

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