It is extremely important for an investor to understand the evolution of the trend and the inflation regime that could emerge following the crisis from Covid-19 because some asset classes may be more resilient and outperform during times when inflation is highest. Under a normal inflation regime – between 2% and 3% – corporate bonds usually tend to perform well thanks to improving economic fundamentals, as do equities, especially quality markets. value and cyclical.
If inflation rises, they claim Monica Defend, Global Head of Research e Vincent Mortier, Deputy CIO di Amundi, there will be a tightening of financial conditions that will halve equity returns to single digits and drag government bonds into negative territory, with the exception of inflation-linked bonds.
Rising inflation: the implications for investment
Asset classes tend to behave differently in various inflation regimes. In the seventies, the equity performance was disappointing, while the raw material they were the most profitable asset class. Historically, thegold has proven to perform best in an inflationary regime, although it has performed well in all three scenarios (deflationary regime, normal regime and inflationary regime). It is one of the few assets that has posted positive returns in any scenario.
For 2021, in a probable normal inflation regime, alternative assets could be attractive and in such a scenario where there are some risks of rising inflation, investors should increase diversification, including assets that better withstand higher inflation, experts say.
Normal inflation has proven to be the best regime for equities as well. Equity returns performed best under normal inflation regimes as healthy economic growth and accommodative monetary policies favor risk appetite in financial markets.
As has happened in the credit markets, the tightening of monetary policy during times when inflation is highest (inflationary regime) weighs on the returns of risky assets because as interest rates rise, the returns of most equity indices fall below 10%.
Solutions targeting real returns across a broad range of asset classes will be attractive in a normal inflationary regime with bullish risks. These include real assets, inflation-linked bonds, floating rate notes, commodities and equity sectors linked to the real economy, which tend to outperform in an environment of rising inflation.