Wall Street Pro From Goldman to JPMorgan on a new era of inflation

Photographer: Michael Nagle / Bloomberg

It is the invisible force that is shaking Wall Street: a rebirth of inflation for the post-lockout era that could change everything in the world of multi-asset investments.

As America’s infatuation with the economy works, the price is derived from the market. the highest expectations in more than a decade, Bloomberg solicited the views of top money managers on their make-or-break hedging strategies.

One thing: the economy of trading in stocks and real estate at interest rates would be reversed if projected price cuts are to be believed.

However, there are clear divisions. Goldman Sachs Group Inc. says the commodities have proven their strength over a century, while JPMorgan Asset Management is skeptical – preferring to hide in alternative assets such as infrastructure.

Meanwhile, Pimco warns that the market’s obsession with inflation is out of place, with central banks still able to exceed targets in the next 18 months.

The comments below have been edited for clarity.

Alberto Gallo, partner and portfolio manager at Algebris

• Appreciate hedges, including convertible bonds and commodities

We do not know at this time whether the recovery in inflation will be sustained, but it is a good start. What we do know is that markets are completely positioned in the wrong way. Investors have been active in long-term QE, such as treasuries, investment grade debt, gold stocks and technology. They were long on Wall Street and they were short Main Street for a decade.

There will be a turnover in assets in the real economy, such as small capital, financial and energy stocks instead of installments and loans, which will generate a lot of volatility. We like convertible debt in value sectors that are linked to an acceleration of the cycle. We also like goods.

We are moving back from an environment where central banks pushed the acceleration, keeping interest rates low, while governments pulled the brakes with austerity, to one in which governments and central banks are now working together.

Thushka Maharaj, global many-asset strategist at JPMorgan Asset Management

• It prefers real assets to bonds protected by commodities and prices

Goods tend to be volatile and do not necessarily provide good protection against inflation. Regarding index-linked bonds, our study showed that their long duration exceeds the pure inflation compensation offered by this asset. It is not the top asset on our inflation hedge list.

If inflation were to rise and continue to rise – and we believe it is a low-probability event – the recovery-oriented sectors would offer a good investment profile. We also like real assets and the dollar.

We expect inflation volatility, especially at the main level in the next few months, mainly above Q2, driven by base effects, excessive short-term demand and the disruption of supply chains caused by a long period of deadlock. We see this as transient and expect central banks to look at short-term volatility.

Christian Mueller-Glissmann, General Manager for Portfolio Strategy and Asset Allocation at Goldman Sachs Group Inc.

• Issue a warning on index bonds and gold

We have found that, amid high inflation, goods, especially oil, are the best cover. They have the best history of the last 100 years to protect you from unforeseen inflation – one that is driven by a lack of goods and services and even wage inflation of this kind in the late 1960s. The shares have a mixed record. We like valuable stocks because they are short-lived.

The biggest surprise is gold. People often see gold as the most obvious hedge against inflation. But it all depends on the Fed’s response to inflation. If the central bank does not anchor back-end yields, then gold is probably not a good choice, as real yields could rise. We see bonds related to indices as in the same camp as gold.

A scenario of sustained inflation of over 3% and growth is not our basic case, but this risk has certainly increased compared to the previous cycle.

Nicola Mai, sovereign credit analyst at Pimco

• He says inflation could exceed the central bank’s targets in the next 18 months

Looking at the short-term volatility introduced by energy prices and other volatile price components, we note that inflation remains low in the short term, with central bank inflation targets being evasive over the next 18 months or so. The global economy has spare capacities to meet growing demand. However, if spending were to rise steadily over the years, this would probably lead to higher inflationary pressures.

We generally like curve strategies, and we believe that the US SUGGESTIONS provide reasonable assurance of overcoming inflation. Real estate goods and assets should also benefit in an environment of rising inflation.