What is inflation?
Inflation is back! Across the board...
So, what is driving inflation?
Inflation and Investing
Multi Asset & Diversifiers
Source: (1) year-over-year;
(2) Consumer Price Index – tracks a ‘basket’ of commonly purchased goods & services;
(*) as of 20 September 2022
USA yoy CPI
vs 1.6% in August '21
Eurozone yoy CPI
vs 3% in August '21
UK yoy CPI
vs 3% in August '21
China yoy CPI
vs 0.8% in August '21
Switzerland yoy CPI August '22
vs 0.9% in August '21
Rising inflation is now a global phenomenon, as an already disrupted supply chain faces increased commodity prices.
With inflation running above Central Bank targets, 2022 might definitively mark the end of an era of low inflation and interest rates.
US Bureau of Labor Statistics*
Office for National Statistics**
Swiss Federal Statistical Office*
National Bureau of Statistics of China*
Factors currently boosting inflation
Relevant for: Long term
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
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
Increased costs to customers and supply chain bottlenecks
Relevant for: 2022
We believe soaring shipping costs, recovering demand, re-shoring policies, and supply-chain disruptions will keep inflation high in 2022.
Geopolitics fuel inflation through commodity prices
The Russia-Ukraine war has exacerbated preexisting inflationary pressures, by catalysing significant disruptions in commodity markets.
Source: Amundi Institute as of 11 April 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.
”For investors, it is of paramount importance to look at portfolio construction through the inflation
lens in the search for areas of resilience.”
Chairman, Amundi Institute
to inflation and/or rising interest rates
For illustrative purposes only.
Multi-Asset & Diversifiers
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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.
Value, tilt to quality
Given the large discount to Growth, we believe the rotation to Value to be a multi-year trend. However, this will not be a straight line.
In our view, investors should consider businesses with a value and high-quality tilt, relying more on selection rather than market directionality.
Higher-yielding assets can warrant above-inflation returns. Historically, dividend strategies worked relatively well during times of high(er) inflation.
We believe investors can look to complement their search for income with dividends and other
sources of returns.
US looks resilient
There is room to favour US equities over Europe’s, given the limited impact of the crisis on US earnings and the higher ability of US companies to pass on inflation to consumers and maintain margins.
Over the past decade, US stocks have shown they can be more resilient to rising rates than European equities.
*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.
We believe an agile and realreturn
mindset is paramount – i.e. one that adapts strategies to enhance portfolio income by considering Emerging Market bonds and US credit selectively.
Flexibility is the name of
the game in fixed income.
Long duration assets can be more sensitive to increases in the interest rates versus short-duration assets. During times of an uncertain inflation outlook and moving interest rates, we believe investors
should pay attention to duration.
Preferring short duration
assets can protect investors
during rising interest rates.
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 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.
Although the recent rally has allowed commodities to close their undervaluation gap with economic growth, we believe the asset class still looks attractive adjusted for inventories and considering favourable structural forces.
Commodities can do well during high inflation, but be aware of high volatility.
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.
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; Opinions, estimates, views, forecasts, projections and statements of financial market trends are based on market conditions at the date of the publication, constitute our judgment and are subject to change without prior notice. There can be no guarantee they will be met.
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 May 2022