Multi asset investors need to rethink their portfolios and make them resilient to higher inflation, according to a white paper issued by Amundi Asset Management.
In an inflationary environment, which Amundi predicts in 2022, Matteo Germano, head of multi asset, said equity markets will be less supported than they have in the past three decades.
In such conditions, while noting equity returns should stay positive, Germano noted they are likely to stop into the low single digits range.
“In 2021, we entered a hyperinflationary phase, with US CPI and PPI indicators in the 6-10% range on average,” he said. “US CPI ended the year at 7% year-on-year, its fastest growth pace in almost 40 years.”
For Germano, such a scenario is likely to persist in the first part of 2022, with inflation proving to be “structurally higher” than its pre-crisis levels, before trends start to normalise in the middle of the year.
“Targeting real returns becomes critical in a world of lower returns and higher inflation, investors should be aware of the ‘nominal illusion’,” he said. “To do this, investors should look at a broad set of asset classes that could prove resilient to inflation and help target real returns.”
Cyclical stocks
So which assets investors be looking to? Germano noted that any inflationary pressure arising in a strong growth scenario favours cyclical stocks over defensive ones.
“As such, investors should tilt their portfolios towards value and quality sectors across equity markets,” he said. “Across the fixed income space, inflation-linked bonds tend to outperform corporate bonds in an inflationary regime, as credit spreads usually tighten in inflationary times.”
As monetary accommodation is withdrawn under an inflationary regime, he added that interest rates tend to be higher and as a result a short duration bias should be favoured.
To hedge against the risk of last year’s hyper-inflationary environment continuing beyond the second and third quarters of 2022, Germano said in these conditions, commodities have proved to be the best performing asset class.
“Building some exposure to commodity currencies may also prove to be beneficial under this scenario, while in a hyper-inflationary recession gold should be efficient for hedging,” he said.
