Inflation is here to stay
Soaring energy prices heighten inflation fears, investors need to rethink their asset allocation
As we enter the second half of 2022, geopolitical and macroeconomic uncertainties show no sign of easing
A new inflation regime is underway, but markets have yet to price in fully the primary drivers of inflation
The ongoing war between Russia and Ukraine has put additional pressure on commodity prices and supply chains adding to the already high inflation figures. This, coupled with rising interest rates, have created a challenging environment felt across all industries, particularly in the energy sector.
For investors, this means rethinking their portfolio construction through the inflation (and real rates) lens in the search for areas of resilience.
Key investment themes
Key investment themes offering protection from inflation risk
- We believe that the move towards value remains a medium-term trend. The path will not be linear and investors need to focus on selection rather than market directionality.
- Investors should look for brands, patents, and differentiated products that allow companies with strong business models to raise prices, preserve margins, and pay dividends.
- While uncertainty related to the Russia-Ukraine war has weighed on sentiment, the US and European value sectors have outperformed growth so far.
- Investors should be flexible and include instruments such as securitised credit, floating-rate notes, and inflation-linked bonds, alongside high-yield and emerging-market debt and unlisted assets to propel portfolio returns.
- Flexibility will be paramount on duration, as the fast rate repricing may offer opportunities in fixed income markets, especially on the US short-end of the curve which has already priced in an aggressive hiking cycle by the Fed.
- In credit, there are concerns related to inflation and liquidity, but default rates are low and earnings strong. To deal with inflation, focus on names with the ability to pass on higher costs to consumers. In IG, short- and medium-term maturity credit is preferred; in HY, there are spread compression opportunities (hybrids, BB/CCC) in areas with potential to improve their credit metrics. Here, investors should prioritise diversification and liquidity.
- Higher-yielding asset classes can provide above-inflation returns. Often, they can be found across alternative asset classes, so a broad-based investment approach -- beyond the traditional benchmark approach -- will be paramount. But in the current environment, uncertainty is high and selectivity is needed.
- We believe that the move towards value remains a medium-term trend. The path will not be linear and investors need to focus on selection rather than market directionality.
- Investors should look for brands, patents, and differentiated products that allow companies with strong business models to raise prices, preserve margins, and pay dividends.
- While uncertainty related to the Russia-Ukraine war has weighed on sentiment, the US and European value sectors have outperformed growth so far.
- Investors should be flexible and include instruments such as securitised credit, floating-rate notes, and inflation-linked bonds, alongside high-yield and emerging-market debt and unlisted assets to propel portfolio returns.
- Flexibility will be paramount on duration, as the fast rate repricing may offer opportunities in fixed income markets, especially on the US short-end of the curve which has already priced in an aggressive hiking cycle by the Fed.
- In credit, there are concerns related to inflation and liquidity, but default rates are low and earnings strong. To deal with inflation, focus on names with the ability to pass on higher costs to consumers. In IG, short- and medium-term maturity credit is preferred; in HY, there are spread compression opportunities (hybrids, BB/CCC) in areas with potential to improve their credit metrics. Here, investors should prioritise diversification and liquidity.
- Higher-yielding asset classes can provide above-inflation returns. Often, they can be found across alternative asset classes, so a broad-based investment approach -- beyond the traditional benchmark approach -- will be paramount. But in the current environment, uncertainty is high and selectivity is needed.
1 Source: Amundi, Bloomberg, as of 7 April 2022. Russell 3000 Value Index/Russell 3000 Growth Index and MSCI Europe Value/MSCI Europe Growth Index on left-hand scale. Year-to-date 7 April 2022.
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