fund managers play the long-term game on inflation According to Reuters

© Reuters. FILE PHOTO: Image of a bull or bull on Wall Street in the Manhattan borough of New York City, New York, U.S., January 16, 2019. REUTERS/Carlo Allegri/File Photo

By Yoruk Bahceli and Sujata Rao

AMSTERDAM/LONDON (Reuters) – Unconvinced by central banks’ pledge to contain inflation, many investors are hunting for assets that will protect their portfolios from a drop in value. of money for many years.

These funds are buying inflation-linked bonds and real estate, while making long-term bets on the ability of stocks to perform well, including those in sectors like timber and farmland.

Pascal Blanque, head of investment institutes at Amundi, Europe’s largest fund manager, said: “The new game in town is to maintain the purchasing power of a portfolio, when it comes to hunting for stocks. assets that yield returns that match or surpass inflation.

The rise of inflation, after a long hiatus, has caught central banks off guard.

The Federal Reserve on Wednesday is likely to raise interest rates by 0.75% to a range of 2.25% to 2.5%, the highest since 2019. Fed Chairman Jerome Powell is expected to reaffirmed the bank’s determination to return to the inflation target. Depression.

Policymakers are on the right track, if markets are to be believed. Market-based inflation measures are falling towards central bank targets and an odd 60 basis points has been removed from the Fed’s top valuation for this cycle..

The eurozone’s long-term inflation expectations have also fallen back since May.

However, many investors are preparing for a prolonged period of “sticky” inflation, somewhat similar to the low growth and high prices of the 1970s, and do not expect inflation to slow down. back to the 2% target set by central banks.

BofA’s latest monthly survey shows that fixed inflation is the biggest fear for fund managers running $800 billion in assets.


These fears are primarily motivated by two factors.

First, central banks will counter the inflationary effects of tight commodity and employment markets, and the rising costs of transitioning to a greener global economy, which monetary policy cannot afford. usually can do less.

The remaining problem may be the central banks themselves.

With inflation four times the target, it’s hard not to look back at Paul Volcker, the Fed chairman, who raised interest rates to 20 percent in the 1980s, sending the economy into recession but inflation at two. numbers.

Few think today’s central banks share Volcker’s solution for killing inflation, or can ignore the impact on economies, especially as the current explosive levels of debt cause borrowers to It is difficult to accept strongly higher interest rates.

“Inflation will be much more persistent than the market is pricing in … because the Fed won’t see (a rate hike) through,” said BlackRock (NYSE:) Investment Institute deputy director Alex Brazier said.

A former member of the Bank of England’s financial policy committee, Brazier expects the Fed to raise interest rates to 3.5%, but slowing growth will evoke “a more nuanced response.” .

The result, he predicts, will be surplus inflation of 5% next year and above 3% in 2024, well above the Fed’s average projections of 2.6% and 2.2% on the index. personal consumption expenditure.

That view underpins BlackRock’s longer-term recommendation on stocks than on government bonds, with a company being “lighter” on longer-term debt because investors would want to be more compensated for inflation.

Jim Reid, Deutsche Bank (ETR:), head of global credit strategy, thinks the Fed will stop raising rates before they raise rates to the 5% “limited” zone needed to cool down inflation, leaving ” unfinished inflation business.


However, investors who choose to insulate themselves from higher inflation, stubbornly high price growth will likely make it harder to profit than during the easy money periods of the past two decades when inflation at low and predictable levels.

Chris Jeffery, head of inflation rates and strategy at Legal and General Investment Management, predicts US core inflation at 4% next year.

In addition to assets, he also buys timber and farmland-related stocks and Treasury Inflation Protected Securities (TIPS), following a recent drop in inflation expectations.

“You don’t have to overcomplicate this,” says Jeffery. “If you’re looking to hedge against inflation, TIPS isn’t that expensive.”

Some assets that performed strongly in the 1970s are shining this year.

A Deutsche Bank study found that gold, silver, and oil prevailed in the 1970s, with average annual returns adjusted for inflation around 20%, followed by assets, aluminum, nickel, corn, soybeans and wheat.

BofA’s latest monthly survey found that “long” and energy commodities were the second most popular trades in July.

Deutsche Bank’s Reid said better-performing stock and bond indexes in recent years were expected to be attributed to low and stable inflation, but such price stability is no longer available.

The Deutsche study recorded actual losses of about 1% annually throughout the 1970s.

“If you believe the (low inflation) era is reversing, it’s very difficult to see financial assets doing well overall,” Reid added.

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