Many investors are looking for assets that can shield their portfolios against years of inflation.
These funds acquire inflation-linked bonds and real estate and make long-term bets on stocks, including timber and farms.
Pascal Blanque, head of the investing institute at Amundi, Europe’s largest fund manager, said the new game is to retain the portfolio’s purchasing power.
After a long vacation, inflation has resurfaced, surprising central bankers.
On Wednesday, the Fed is expected to raise rates by 0.75 percent, the most since 2019.Jerome Powell is expected to reaffirm the Fed’s commitment to returning inflation to target, even if it means recession.
Markets say policymakers are on the right track. Market-based inflation gauges are dropping near central bank targets, and peak Fed rate prices have been cut by 60 basis points.
Since May, long-term eurozone inflation expectations have dropped.
Many investors foresee a lengthy period of “sticky” inflation, similar to the 1970s era of sluggish growth and rising prices, and do not expect inflation to fall to the 2% level desired by central banks.
BofA’s latest monthly survey indicated $800 billion fund managers fear sticky inflation.
VOLKER
Two things fuel these anxieties.
First, conventional monetary policy can do little to mitigate the inflationary impacts of tight commodities and job markets and switching to a greener global economy.
Central banks may be another problem.
With inflation more than four times the objective, it’s impossible not to think of Paul Volcker, the Fed chairman who raised rates to 20% in the 1980s to kill double-digit inflation.
Few think central banks today share Volcker’s inflation-killing drive or can ignore the blow to economies, especially as present debt levels make it hard for borrowers to tolerate much higher rates.
Alex Brazier, deputy chairman of BlackRock (NYSE:BLK) Investment Institute, said inflation will be more persistent than markets expect since the Fed won’t complete rate hikes.
Brazier anticipates the Fed raising rates to 3.5 percent, but a steep growth slowdown would elicit “a more nuanced response.”
He projects 5 percent-plus inflation next year and above 3 percent in 2024, significantly above the Fed’s 2.6% and 2.2% median PCE price index estimates.
This stance underscores BlackRock’s recommendation for equities over government bonds, with a firm “underweight” for longer-maturity debt because investors will seek higher inflation compensation.
Jim Reid, head of global fundamental credit strategy at Deutsche Bank (ETR:DBKGn), thinks the Fed won’t raise rates to 5% to calm inflation, leaving “unfinished inflationary work.”
No easy money.
Regardless of how investors choose to insulate themselves from inflation, rapid price increases will undoubtedly make it harder to deliver profits than during the easy-money period of the preceding two decades.
Legal and General Investment Management’s rates and inflation strategist forecasts 4% core inflation next year.
He’s also buying forestry and agriculture equities and TIPS when inflation expectations fall.
“Don’t overcomplicate it. “TIPs are no longer eye-wateringly pricey for inflation protection,” explained Jeffery.
Some 1970s-era assets are thriving now.
Gold, silver, and oil had the highest inflation-adjusted returns in the 1970s, followed by property, aluminium, nickel, maize, soybeans, and wheat.
“Long” commodities and energy were the second-most popular trades in July, according to BofA.
Recent stock and bond index outperformance was based on low and stable inflation, but that no longer exists.
Deutsche’s investigation discovered annual S&P 500 losses of 1% in the 1970s.
“If you believe (low inflation) is reversing, financial assets won’t do well,” Reid said.