Francesco Curto (head of research, asset management firm DWS), said that inflation will continue to fall after imminent highs, however, he believes it is unlikely for the price to drop significantly in the immediate future. Curto advised investors to seek out companies with strong pricing power and recommended they do so.

U.S. inflation came in at 7% in DecemberNew figures released Wednesday show that it has printed its largest print ever since 1982 on an annual basis. In parallel, inflation in Europe, Britain, and elsewhere has reached multi-decade heights. These factors have led most central banks to guide the market toward tighter monetary policies, with the exception being the European Central Bank.

U.S. Federal Reserve Chairman Jerome Powell told a Congressional hearingOn Tuesday, he stated that inflation would only be controlled by interest rate increases and a smaller balance, which he called a “normalizing of policy.”

Curto however stated to CNBC that rising carbon and energy prices are necessary for governments to reduce their emissions. This would stop Curto from recommending that normalization be done so that inflation is able pull back towards the central bank’s targets.

He argued that lower prices would help consumers re-engage with their spending habits in the wake of the pandemic, even though Covid-era restraints were lifted.

People are likely to feel upset if they suddenly see inflation eating away at their spending power after the pandemic. He said that this is an obvious risk for sustainability.

The investment story has been dominated by a rotation of highly-valued growth stocks such as “Big Tech”, which refers to companies like AppleAnd Alphabet), towards value stocks. These companies trade at a discount relative the their financial foundations. Banks and energy were both successful in 2021 due to higher expected interest rates.

The various Big Tech stock sell-offs, such as the one last week, have not been long-lasting, putting into doubt the anticipated inverse relationship between growth and value. Curto shared the sentiments of other commentators and noted that there is a significant difference in the pricing power of proven tech stocks and speculative ones.

He said that there has been a substantial negative adjustment in the price of some speculative assets over the past 12 months. This was mainly due to quantitative easing and fast money. There were also questions as to whether the business would be able to provide real profitability. Investors should remain cautious regarding this market segment.

2022: “A more nuanced approach”

Although the tech-heavy Nasdaq 100 was hit hard in the opening week of the new year, it has rebounded since then as the shift from growth to value seems to have subsided in recent sessions.

It is important to find companies with strong pricing power to help navigate the inflation market. Curto stated that it is as easy as that, noting the fact that certain value stocks are lacking this pricing power as shown by several U.K energy suppliers going out of business due to higher energy prices in 2021.

Some technology companies have strong pricing power. However, some valuations have been too high. These companies cannot be expected to continue growing indefinitely.

Curto said that DWS Frankfurt, with 880 billion euro ($1 trillion) in assets, focuses on structurally sound companies and strong profitability. It does not try to do thematic or sectoral rotations. In 2022 Curto recommended that investors adopt a more nuanced strategy than simply buying stocks in line with economic recovery.

This market is a good place to invest because it will allow you to weather inflation. The companies’ pricing power means that they can pass the increased input prices on to you.

Curto said that this means growth momentum may not “fizzle out” as some key stock players, like the U.S. tech giants, have still strong pricing power. However, the more risky stocks that have not yet secured strong cash flows could struggle.

Curto stated that the higher interest rate and inflation will benefit banks in the value sector of the market. However, Curto also noted that some companies operating in the energy industry may see a benefit from the reductions they need to make. This will increase their profitability provided the governments don’t raise taxes.

But not all people agree with this viewpoint. BCA Research and Goldman Sachs reiterated Wednesday their base assumptions regarding a continued broad growth-to–value rotation. The former advocated for themes and sectors that are more likely to outperform in an environment of rising interest rates.