Exploring real assets and absolute return strategies in an inflationary regime
Article | September 2022 | 2 minute read
Inflation is running significantly above central bank targets across the world. Heightened global conflict has further contributed to this inflationary trend. A regime shift away from a world of low inflation and interest rates is settling in, as hawkish Central Banks strive to navigate growing concerns of a recession and possible stagflation[1,2].
During the first half of 2022, equity and bond markets responded to aforementioned market trends in the following ways:
- The global equities markets had their worst first half-year in decades[3].
- At the same time, both US and European sovereign bond markets have also lost ground[6].
Amid such volatility, we believe it can be prudent to seek additional ways to protect capital from inflation beyond traditional equity/bond allocations.
We believe real assets and absolute return strategies exhibit characteristics that may make them particularly attractive in the current market.
What are real assets?
Real assets are a category of assets that are usually directly connected to the productive capacity of an economy: infrastructure, materials, commodities and real estate[4]. So, toll roads, airports, utilities, metal, timber, offices and precious metals are all included in this category.
The value of real assets is often tied to the development of price levels, frequently governed by regulatory frameworks or contractual agreements. The easiest example is rent - which is indexed for inflation. This can allow real estate companies to generate rental yields above inflation[5]. Further, the regulatory frameworks governing utilities and pipeline operators allow tariff adjustments based on cost-price inflation[8].
Because the value of these assets can often be connected to the development of price levels, real assets have historically performed well during times of increased inflation[8]. Inflation-Linked Bonds are often included in real assets as well due to their direct connection to inflation.
We believe adding real assets to a portfolio may contribute to increased diversification*. Historically, real assets have demonstrated a low correlation with bonds and equities[7]. Moreover, some real asset sectors exhibit low correlation even among themselves. This may enable a high degree of flexibility in the construction of a diversified portfolio.
Absolute Return Strategies
Absolute return strategies and funds do not have a pre-defined benchmark. Their aim is to simply try and deliver a positive return over the medium term (usually 3 to 4 years), regardless of market conditions[8]. In our view, absolute return funds may also offer potential diversification*, however a positive return is not guaranteed.
These funds usually employ a macro strategy and can participate in several different markets using various strategies to try and capture investment opportunities. Absolute return funds can, for example, use long/short strategies – selling short a security they expect to be overvalued and buying something they expect to be undervalued.
Possible investment implications for absolute return strategies
We believe the flexibility of absolute return strategies can be a key advantage during an inflationary period, especially as a wide swathe of traditional asset classes can be negatively impacted. As they are unconstrained to any particular asset class or strategy, we believe absolute return funds can respond highly efficiently to different situations. For example, by buying inflation-protected bonds or broadening their exposure to commodities.
As the current inflationary environment persists, we believe real assets and absolute return strategies may become increasingly relevant from a portfolio construction perspective. For more information, dive into our papers on real assets and absolute return.
Sources:
* Diversification does not guarantee a profit or protect against a loss.
[1] Commodity prices surge due to the war in Ukraine, World Bank blogs, as at May 2022
[2] Amundi Global Investment Views, August 2022
[3] CNBC, 2022,
https://www.cnbc.com/2022/06/30/the-markets-worst-first-half-in-50-years-has-all-come-down-to-one-thing.html
[4] Amundi - Real Assets in an Inflationary Environment, 2022
[5] Forbes, 2021,
https://www.forbes.com/sites/forbesrealestatecouncil/2021/09/28/is-real-estate-a-hedge-against-inflation/?sh=730d4d3d19da
[6] Macroeconomic picture – July/August 2022, Amundi
[7] Amundi - Real Assets in an Inflationary Environment, 2022.
[8] Amundi – Absolute Return Strategies in an Inflationary context, 2022
Important Information
Unless otherwise stated, all information contained in this document is from Amundi Asset Management S.A.S. and is as of end of June 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.
Date of first use: September 2022
Doc ID: 2433563
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