Inflation: running amok
After decades of below-target inflation, the world is in unfamiliar territory. Inflation is rampant across much of the world, driven by a perfect storm of excess fiscal stimulus in the US, disrupted labour markets, supply chain bottlenecks induced by the Covid-19 pandemic and, most recently, the war in Ukraine which has increased food and energy prices globally.
While some of these factors should wane, others could persist, leading to the prospect of sustained inflation.
To cool consumer demand and dampen wage demands, central banks are resorting to higher interest rates. Companies may respond to price pressures by adjusting their supply chains and increasing automation. There’s also the possibility of social instability as inflation disproportionately hurts lower income countries and households.
HIGHER POLICY RATES
REWORKED SUPPLY CHAINS
Against this backdrop, markets look set to have to contend with inflation for the foreseeable future. Investors wanting to protect their portfolios may want to consider some of these ideas.
Over the long run, inflation-linked bonds could outperform nominal government bonds if inflation exceeds expectations.
Loans with adjustable interest rates will be able to adapt more quickly to a rising rate environment.
Multi-asset portfolios can balance the upside potential of equities with the downside protection of bonds.
Many thematic funds have a growth bias, but defensive thematics can weather rate rises better. Select themes may benefit from longer-term trends with less interest-rate sensitivity.
Common value sectors include commodities and financials that generally do well when the yield curve is steepening.
To learn more about how we can help you meet your investment goals, please speak to your client relationship manager.
FRONT OF MIND| Article – 5 Min
FRONT OF MIND| Infographic – 1 Min
PORTFOLIO PERSPECTIVES| Podcast – 15:15 min
Past performance is not indicative of current or future performance.
Any views expressed here are those of the author as of the date of publication, based on available information, and subject to change without notice. This material does not constitute investment advice.
Investments are subject to market fluctuations and the risks inherent in investments in securities. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial investment. There is no guarantee that the performance objective will be achieved.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
BNP Paribas Asset Management seeks to integrate environmental, social and governance (“ESG”) factors into all of our portfolios as a means to mitigate certain short, medium and long-term financial risks, identify better long-term investments, and encourage more responsible corporate behaviour. We will never subordinate our client’s interests to unrelated objectives. Certain issuers and industries are excluded from our actively managed portfolios based upon our view of their ESG performance and risk profile. As a result, we may pass up certain opportunities when these excluded issuers or industries are in favour. Due to significant gaps in disclosure regimes around the world, we may need to rely upon voluntary disclosures by issuers, which are often not audited. We therefore may not have consistent access to complete, accurate or comparable information about the ESG performance of our holdings. Please consult the applicable offering document for more information about the specific ESG strategy employed by each investment strategy since a given strategy may not have specific ESG guidelines, and investments are not limited to securities that are ESG compatible.