Amundi Convictions: Income as a source of resilience
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Discover how income could act as a possible source of resilience*
The world is grappling with inflation that has reached a level we have not witnessed in many years. This phenomenon is especially visible in developed markets (DM) and is driven by multiple shocks (such as supply chain bottlenecks and geopolitical tension) as well as the tail end of the Covid-19 pandemic.
In this complex scenario, we believe that achieving real income will be a key element for investors seeking to mitigate the negative effects of inflation.
*Diversification does not guarantee a profit or protect against a loss.
How did we get here?
European households have constantly increased their exposure to cash, accumulating funds into bank deposits since 2016. This phenomenon has been particularly exacerbated by the Covid-19 pandemic, where objective constraints to spending have further supported this increasing trend. The amount of money amassed by households grew by €3,000 bn between 2016 and 2021, roughly 28% of their financial wealth.
However, inflation has been on the rise and has eroded a significant portion of the purchasing power of the money saved. By the end of 2022, the accumulated loss since 2016 is expected to reach roughly €1,400 bn.
Bank deposits held by European Households
Source: Amundi Institute on EFAMA Market Insights data, ECB and European commission June 2022. 2022 estimate based on European Commission’s spring 2022 estimation of inflation in the European Union for this year (6.8%)
High energy prices, combined with geopolitical tensions, are contributing to exceptionally high inflation in developed markets, especially when compared to the pre-Covid period. Central Banks around the world are continuing the fight against this phenomenon by hiking interest rates and keep tightening financial conditions. However, as a positive note, we do believe that inflation is starting to slow down and may descend in the near future.
A new inflation regime after Covid 19
Source: Amundi Institute on IMF data and forecasts. Latest data and forecasts available as of 14 November 2022.
Inflation and uncertainty, due to geopolitical risks and the energy crisis, deeply influenced the performances of equity and bond markets. 2022 will probably be remembered as one of the worst years on record for investors, with a “double negative” situation, pushing market participants to avoid risks and look for conservative solutions.
2022 performance: 1 year in a century
Source: Amundi Institute, Global Financial data. Data is as of 31 October 2022. Past performance is no guarantee of future results.
We believe that, in the future, inflation may adjust to an overall higher level than in the past, so investors need to target sufficient income with the aim of helping them mitigate the negative effects of the loss of purchasing power. Over time, we believe that seeking additional income would be the key factor for investors wishing to at least maintain a constant level of wealth, as per in the example below:
Hypothetical Wealth Projections of a €100,000 De-cumulation Portfolio; €3,000 Annual Withdrawal and no capital appreciation
Source: Amundi Institute for illustrative purposes. The simulation assumes that the annual withdrawal rises in line with inflation, no capital appreciation and that the remaining capital increases at the income rate.
Income solutions may vary depending on the time horizon identified by investors. Fixed Income, Multi-Asset and Equity options target different needs and they may contribute positively to preserve wealth in periods of prolonged and sustained inflation.
Important Information Unless otherwise stated, all information contained in this document is from Amundi Asset Management S.A.S. and is as of 22 November 2022. Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are those of the author and not necessarily Amundi Asset Management S.A.S. and are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not a guarantee or indicative of future results.