There is a word that sounds right now in all groups: reflation, or what is the same, the return of inflation .
For weeks, experts have warned of rising prices as a result of the economic recovery, but also of the monetary stimuli put into circulation by central banks. To give us an idea, only the European Central Bank (ECB), the head of monetary policy in the euro area, will inject almost 2 trillion euros.
What are these inflation prospects causing? In the first place, to hedge against this rise in prices, the rise of all assets. Not only stocks, but also the yield curve. Something that the ten-year American Tresuary is already noticing, which climbed to 1.37%.
But despite this, not everyone thinks that it will occur in the short term. Ariel Bezalel, head of Fixed Income strategy at Jupiter AM, believes that it is not close since ” some measures predict that future inflation will be 2.4%, matching the levels forecast in 2017-18 “.
Bezalel points out that “those in favor of reflation could say that we are in an environment of very low inflation, with enormous fiscal and monetary support and high levels of consumer savings accumulated during confinement”, but warns that ” some elements of the reflation market seem too optimistic ”.
A different opinion is shared by Chris Iggo, manager of AXA IM, who explains that the evolution of corporate earnings supports the equity market, despite the rise in the yield of the bond market that “has been driven by the increase in expectations of inflation”.
If inflation really consolidates, what will it mean for the investor? Bond investors might freak out for a start .
This would have an immediate effect on the Fed, which needs to assure markets that it is on top of everything. The message has to be that inflation would have to be higher for longer to alter monetary policy.
Dangers for the investor
The concern is that long-term interest rates may reach a level where they turn negative for credit and stocks.
“This scenario can be very negative for investors in fixed income and, as for the variable, everything will depend on whether business profits exceed the possible fall in multipliers,” explains Pedro del Pozo, from Mutualidad de la Abogacía.
Until now, low inflation or negative inflation had been an ally for the most conservative investor, those who seek to preserve their capital, with minimal risk. This negative inflation compensates these investors for the low returns they obtain since the real return is obtained after adding or subtracting inflation to the yield. Thus, with negative inflation and yields, for example, of 0.2%, real profitability rises to 1%.
In the event that inflation shot up to 2% and returns were 0.5%, the loss of returns would be 1.5%.
From Lyxor they list that both the earnings season and economic data continue to exceed expectations on both sides of the Atlantic, while the latest clinical results on Covid-19 suggest that vaccination campaigns could accelerate substantially in the second quarter.
For this, it is necessary to bet on products that serve to protect the portfolios for this price increase.
Reflationary bets involve cyclical assets such as equities, emerging market assets and commodities, which performed well and could continue to do so.
In the universe of alternative strategies, Global Macro opted for reflationary operations in the last quarter, with an increase in positions in emerging market currencies, commodities and inflation-linked bonds to different degrees.