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It’s the invisible force that rocks Wall Street: a resumption of inflation for the post-lockdown era that could change everything in the world of multi-asset investing.
As America’s madness with a run-it-hot economy sends a derivative market price High expectations for more than a decade, Bloomberg solicited the views of top fund managers on their future breakthrough hedging strategies.
One thing to remember: The economics of trading stocks and real estate at interest rates would be turned upside down if we are to believe the projections of soaring prices.
Yet there are clear divisions. Goldman Sachs Group Inc. says commodities have been proven successful for over a century, while JPMorgan Asset Management is skeptical – preferring to hide in alternative assets like infrastructure.
Pimco, meanwhile, warns that the market’s obsession with inflation is misplaced, with central banks potentially still poised to underachieve targets over the next 18 months.
The comments below have been edited for clarity.
Alberto Gallo, partner and portfolio manager at Algebris
- Likes hedges, including convertible bonds and commodities
We don’t know at this point whether the rise in inflation will be sustained, but it’s a good start. What we do know is that the markets are positioned completely the wrong way round. Investors have long been QE assets such as Treasuries, investment grade debt, gold, and tech stocks. They were long and short on Wall Street Main Street for a decade.
There will be a rotation towards real economy assets such as small caps, financials and energy stocks instead of rates and credit, which will generate a lot of volatility. We like convertible debt in value areas that are tied to an accelerating cycle. We also love raw materials.
We are moving from an environment where central banks have pushed the accelerator by keeping interest rates low while governments applied the handbrake with austerity, to an environment where governments and central banks are now working together.
Thushka Maharaj, global multi-Asset Strategist at JPMorgan Asset Management
- Prefers real assets over commodity and price bonds
Commodities tend to be volatile and do not necessarily offer good protection against inflation. With regard to indexed bonds, our study showed that their long duration outweighed the pure inflation compensation offered by this asset. It is not the main asset on our inflation hedge list.
Should inflation rise and continue to rise – and we believe this is a low probability event – recovery-oriented equity sectors offer a good investment profile. We also like real assets and the dollar.
We expect inflation volatility, particularly at the headline level in the coming months, mainly above 2Q, driven by base effects, short-term excess demand and disruption of supply chains caused by a long lockout period. We see this as transitory and expect central banks to look at short-term volatility.
Christian Mueller-Glissmann, Managing Director of Portfolio Strategy and Asset Allocation at Goldman Sachs Group Inc.
- Issues a warning on indexed bonds and gold
We have found that in a context of high inflation, commodities, especially oil, are the best hedge. They have the best record of the past 100 years to protect you against unexpected inflation – inflation due to scarcity of goods and services, and even wage inflation like this in the late 1960s. a mixed balance sheet. We like value stocks because they are short lived.
The biggest surprise is gold. People often see gold as the most obvious inflation hedge. But it all depends on the Fed’s inflation response function. If the central bank doesn’t anchor back-end yields, then gold is probably not a good choice as real yields could rise. We see indexed bonds on the same side as gold.
A scenario of sustained inflation above 3% and rising is not our base scenario, but this risk has increased significantly compared to the previous cycle.
Nicola Mai, Sovereign Credit Analyst at Pimco
- Inflation could exceed central bank targets in next 18 months, he says
If we look at the short-term volatility introduced by energy prices and other volatile price components, we see inflation remaining low in the short term, with central bank inflation targets elusive at the moment. over the next 18 months or so. The global economy has spare capacity to meet growing demand. However, if spending were to increase steadily over the years, this would likely lead to increased inflationary pressures.
We like curve strategies overall and believe that US TIPS offers reasonable insurance if inflation is exceeded. Commodities and real estate-related assets are also expected to benefit from an environment of rising inflation.
Mark Dowding, Director of Investments at BlueBay Asset Management
- Avoid duration risk and warn against market complacency
Real assets such as property and commodities will have the best value in inflationary situations. Exposure to duration on bonds is not attractive as yields should rise over several years if inflation normalizes to a level higher than we are used to. The most overlooked risk is that there is too much complacency because everyone’s inflation expectations are anchored based on what they have witnessed over the past five to ten years.
If there is another economic recession, policymakers will be in a difficult position. Hence, there is the desire to make sure that you don’t miss out on downside goals. Like a golfer hitting a ball over a scary obstacle, there is a temptation to go big! Ultimately, this means that the results of inflation should be higher, not lower.
– With the help of Tom Hall
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