What is inflation?
January 2023
Inflation remains in focus
So, what is driving inflation?
Inflation and Investing
Equities
Fixed Income
Multi-Asset & Diversifiers
Contents
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Source: (1) year-over-year; (2) Consumer Price Index – tracks a ‘basket’ of commonly purchased goods & services; (*) as of 9 December 2022
7.7%
10.6%
3.0%
2.1%
9.6%
USA yoy CPI October '22 vs 6.1% in October '21
Eurozone yoy CPI October '22 vs 4.1% in October '21
UK yoy CPI October '22 vs 3.8% in October '21
China yoy CPI October '22 vs 2.3% in October '21
Switzerland yoy CPI October '22 vs 1.2% in October '21
High inflation is a global phenomenon, due to the coexistence of several factors. Inflation runs well above Central Banks targets for 2022 and marks the end of the era of low inflation and low interest rates.
Inflation is back! Across the board...
US Bureau of Labor Statistics*
Eurostat*
Office for National Statistics**
Swiss Federal Statistical Office*
National Bureau of Statistics of China*
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Factors currently boosting inflation
Structural factors: the greenflation
Relevant for: Long term
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Structural factors like the energy transition may add to inflationary trends in the medium-long run. Limited renewable energy production capacity and high commodities demand will likely lead to a surge in related energy bills and commodity prices.
Psychological dimension is starting to kick in
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Inflation has a critical psychological dimension. While consumer demand and labour markets are strong, we remain particularly aware of the wage inflation loop, which may become self-fulfilling.
Relevant for: 2022-23
Supply-chain pressures
Relevant for: 2022
We believe still robust consumption, strong labour markets in the US and persistent supply chain pressures would keep inflation above central bank targets.
Geopolitics fuel inflation through commodity prices
The Russia-Ukraine war has exacerbated preexisting inflationary pressures, by catalysing significant disruptions in commodity markets.
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Source: Amundi Institute as of December 2022
Inflation makes a dollar worth less today than in the future, and can erode purchasing power over time. In response to this, Central Banks often raise interest rates to curb the inflationary trend. We believe this environment can have a significant impact on investments where most of the value lies in long-term expectations or in cases where the instrument rate is fixed.
”The current regime shift is characterised by sticky inflation, a shallow recession and global divergences. This underpins the need to focus on inflation-adjusted returns and high quality assets in portfolio building.”
Monica DEFEND Head of Amundi Institute
Less sensitive
More sensitive
to inflation and/or rising interest rates
floating-rate notes 2-yr bond value stocks
versus versus versus
fixed-rate notes 30-yr bond growth stock
For illustrative purposes only.
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Value, dividend, and stock selection as lenses to seek resilience to inflation. Equities can be resilient to higher inflation if the inflation is combined with (GDP) growth.
Combine value with quality
In times of high inflation coupled with slowing growth, investors should include quality and value assets in portfolios and rely more on selection.
Dividend*
In times of high inflation, dividends and share buybacks can boost total shareholder returns. We believe investors should complement their search for income by exploring businesses with a tendency to reward through dividends even during times of an economic downturn.
US looks resilient
Although we are seeing growth deceleration in the US, our central scenario remains of a soft landing because of the resilient consumption environment. As a result, US companies should be able to pass on high costs to consumers, providing selective opportunities in the country.
*Dividends are not guaranteed.
Fixed income strategies to cope with higher rates. At a time when high inflation and hawkish Central Bank stance (upward pressure on yields) meet with investors’ flight to quality (downward pressure on yields), bond prices and credit spreads can move fast.
Government bonds are back
Higher yields offer interesting entry points and bonds, particularly US Treasuries, could be seen as a strong source of portfolio protection and diversification* against recession fears. *Diversification does not guarantee a profit or protect against a loss.
Quality and Flexibility
Agility may be key in fixed income where search for yield at all cost is over. Thus, investors should focus on high quality credit in US investment grade and explore selective opportunities in emerging market bonds.
Floating-rate notes
In our view, floating rate notes do not suffer as much from increased price volatility caused by being ‘locked in’ a certain interest rate when rates move. Floating rate notes may offer stability amid a quickly evolving environment.
Real income assets and enhanced diversification*. The Fed’s indications that it will take “necessary steps” to ensure price stability has been pushing core yields up, both in the US and Europe. This is also increasing market volatility. As correlation dynamics evolve, investors may consider alternative investment strategies that exhibit low correlation.
Commodities
While oil prices may remain capped by growth fears in early 2023, supply issues (tight OPEC+ production, EU ban on Russian crude, low oil stocks) could return to the fore. On the other hand, commodities linked with transition towards green energy could also do well. Gold can also act as a diversifier* and an inflation hedge particularly when the Federal Reserve shows signs of a dovish pivot.
Absolute returns
Multi-assets absolute returns solutions may offer an attractive investment case due to their cross-asset flexibility and dedicated focus on real, absolute returns. Multi-Asset real return solutions can offer real income and enhanced diversification*.
Real Assets
Inflation may increase the potential replacement costs of Infrastructure and Real Estate over time. Further benefits may also come from higher revenues if contracts are inflation-linked. Real Assets can benefit from increased inflation.
*Diversification does not guarantee a profit or protect against a loss.
Unless otherwise stated, all information contained in this document is from Amundi Asset Management S.A.S. and is as of end of April 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 : 6 January 2023 Doc ID#: 2648071
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