Multi-asset investors need to make their portfolios resilient to higher inflation, according to Amundi.
A new paper by the asset manager, ‘Resilient multi-asset portfolios in an inflationary regime’, says targeting real returns becomes critical in a world of lower expected returns and higher inflation and investors should be aware of the ‘nominal illusion.’
Matteo Germano, head of multi-asset at Amundi, says: “In 2021, we entered a hyperinflationary phase. Such a scenario should persist in the first part of 2022, with inflation proving to be structurally higher than its pre-crisis levels.
“Central banks have already acknowledged that inflation is not transitory but they remain behind the curve. There is a narrow window for action to ensure a smooth return to a normal inflation regime and communication will be key to avoiding major market selloffs. This task comes at a challenging time as markets are also assessing the health and economic impact of the new Omicron virus variant and its implications on inflation.
“Investors should look at a broad set of asset classes that could prove resilient to inflation and help target real returns. The different central bank reactions to desynchronised inflation is going to be a source of relative performance in an active asset allocation in 2022.”
In an inflationary regime, which Amundi foresees for 2022, equity markets tend to be less supported than in the normal inflation regime that has prevailed over the past three decades. They are also less supported than in a hyperinflationary recovery as experienced in 2021.
The firm says any inflationary pressure arising in a strong growth scenario favours cyclical stocks over defensive ones and as such, investors should tilt their portfolios towards value and quality sectors across equity markets.
Germano explains: “Across the fixed income space, inflation-linked bonds tend to outperform corporate bonds in an inflationary regime, as credit spreads usually widen in inflationary times. As monetary accommodation is withdrawn under an inflationary regime, interest rates tend to head higher and a short duration bias should be favoured.”
Amundi believes investors must also be aware of the energy transition which could increase inflationary pressures in the current decade as new technology is limited and the demand for energy-transition linked commodities rises. As a result, investors may want to hedge against the risk of a hyperinflationary recovery continuing beyond the third quarter of this year.
The firm says cyclical commodities have proved the best performing asset class and building some exposure to commodity currencies may also prove to be beneficial.
Germano adds: “In summary, we believe that multi-asset investors have a broad set of tools to deal with stronger inflationary pressures. In 2022, they should focus on well-diversified asset allocation and rotate their portfolios towards these asset classes that can benefit from higher inflation.”
