Fund managers tweak portfolios to balance inflation with slowdown

ASSET managers around the world are hoping that their investment strategies will go some way to counter the combination of high inflation and an ongoing economic slowdown.

Institutional Investors expect one-third of their portfolios to be allocated to alternatives and “other”, including real estate, infrastructure and cryptocurrencies

The above are the survey results of 500 institutional investors by Greenwich Coalition and World Gold Council

Pascal Blanqué Amundi’s Chief Investment Officer, spelled out in a conference call potential opportunities and pitfalls in the coming 12 months. The central scenario ( 70 per cent probability) of the French asset manager with €1.81 trillion ($1.59 trn) under management, is the following: Covid will be an “endemic disease with random contagion waves”; there will be a “bumpy” global “soft patch in the first half due to China’s slowdown and accelerating inflation; Climate change will “bite into growth by disrupting the commodity cycle and add to stagflationary trends.”

An “upside” scenario of sustainable growth only has a 15 per cent chance, Amundi predicts. The “downside” also with the low 15 per cent probability, would be a renewed slump towards stagflation and a hard landing in China. Under those circumstances central banks would pump more money into the system and governments would cut tax and borrow more.

In particular, Mr Blanqué and his team are concerned about “malinvestment” in technology and that it is only a matter of time before the tech equity bubble bursts. But they contend that investors have begun to switch towards “value” equities that pay dividends and that China’s stock market “has priced in” the nation’s economic slowdown.

A BoFA survey of fund managers is far more bullish on stocks than the Greenwich survey

Amundi’s relative caution contrasts with overwhelming bullishness amongst 345 traditional and hedge funds managing $1.1 trillion , according to a November survey by BoFA. The managers have slashed their cash holdings to around 4 per cent of their portfolios and 65 per cent are predicting a financial “boom” next year with 61 per cent believing that inflation is transitory.  Only 6 out of a hundred expect a recession in the coming 12 months. The funds are the most overweight in US stocks in eight years. Just over a third of respondents say that emerging markets will be the best performing asset next year and 30 per cent believe that S&P 500 will continue to be a winner. As many as 12 per cent are backing Bitcoin while 10 per cent of the fund managers like oil and gold. They are also “very overweight” inflation assets e.g. commodities and banks and “very underweight” in bonds and emerging markets on the grounds that that are vulnerable to higher interest rates.


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Inflation could be imbedded

Both Amundi and another wealth manager, Plurimi, based in London, believe that inflation is now imbedded at higher levels and could accelerate. They expect the Fed and other central banks to raise interest rates slightly and generally be “behind the curve”. The longstanding pension fund and institutional balance of 60 per cent in equities and 40 per cent in bonds won’t work in this environment. Plurimi contends that commodities will extend their bull run in 2022 and gold will be an “imperfect safe haven against inflation”. US treasuries, especially long term bonds should be avoided. Investors should only seek equities with “undemanding multiples” and the companies should have “pricing power”.

Higher inflation, supply chain shortages and production bottlenecks may affect stock valuations, Amundi states. This especially applies to companies which cannot pass on rising costs to consumers. Instead investors should seek stocks with strong brands, intellectual property and a dominant market position. Provided the share prices haven’t already surged, companies involved in green technology and infrastructure could perform.

Contrary view on emerging markets

In contrast to many asset managers, Amundi contends that emerging market equities, especially Indonesian “are compelling”. Amundi officials believe that they are supported by the rebound in global trade, the vaccine rollout is improving and China appears to be containing the real estate slide. Profitability is normalising and average emerging market forward PE’s are currently 13.1 close to its 12 year median of 11. In contrast the US estimated forward PE for 2022 is 22 slightly below its 12 year high. Europe at 15.7 is near its high, but Japan’s PE of 15 is only 1 point higher than its median.

Singapore and South Korea are dependent on a recovery in China and exports are rising. Korean equity valuations, however, are expensive relative to Singapore. Moreover, ASEAN currencies are partially linked to the renminbi which is expected to be stronger than the dollar, according to Amundi.

Overall Amundi rates US value shares as positive in 2022 but growth shares, negative. Europe and emerging markets positive, Japan and China neutral to positive.

© copyright Neil Behrmann.( This article was first published in The Business Times Singapore . For other Asian and global articles try

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