We are on the eve of the historic turning point for Europe, with the ECB that he will have to raise interest rates for the first time in 10 years to try to fight inflation, on 21 July. Next week, July 26, it will be the turn of the Fed which has already begun monetary tightening some time ago to curb the even stronger race in US prices.
The dilemma is always the same: to strike to death theinflation, with the risk of also affecting the economy and causing a recession?
From history comes the way forward wanted by the Fed chairman Paul Volcker in the 80s to expeditiously raise rates, which led to a major recession in the United States, with the unemployment rate climbing to 10%.
“ECB and Fed will necessarily have to move in different ways, because the inflations that the two countries are facing are different” he says Andrea Pescatori, CEO of VerCapital. “We have supply inflation, while in the US the demand component is more important. The answers must therefore be different: inflation from demand is affected very effectively by raising rates, inflation from supply even with rates little is done. However, the ECB is backed to the wall and will have to raise its rate in any case”. Expectations are for a rise by the ECB of 0,25% from the current -0,50%.
In this situation, how can we orient ourselves in investments? In general, it is probably time to review the asset allocation as a whole and diversify as much as possible, strategists say, with a mix of stocks, bonds, ETFs. However, some instruments are more suitable than others in the fight againstinflation. Here are some tips from the experts.
Securities anchored to the trend of inflation: Btp Italia, Btpei, Tips
Last week, Istat announced the final data on inflation for June, which rose on an annual basis to 8%, from +6,8% in May, confirming the preliminary estimate. In Italy the Treasury regularly issues the BTP Italy, the only Btp indexed to the Italian inflation rate (Foi Index, excluding tobacco products, of consumer prices for blue and white-collar families, net of tobacco products). Every six months they pay fixed-rate interest on the capital revalued according to the inflation of the reference semester, based on the Istat index. In addition, whoever holds the security until its natural maturity will also enjoy the so-called "loyalty bonus" equal to 1% of the invested capital. The Ministry of Economy and Finance announced that in third quarter 2022 will issue a new 5-year BTP (maturity 01/12/2027), with a minimum amount of the entire issue equal to 10 billion euro. If, on the other hand, instruments indexed to European inflation are desired, the MEF regularly issues i btpei, with maturities from 18 months to 3, 5, 7, 10, 15, 20 and 30 years.
There would also be i Postal savings bonds issued by Cassa Depositi e Prestiti, distributed through Poste Italiane branches, which have lower yields. According to some market sources, CDP is studying an increase in interest rates on postal savings bonds. The new 3×4 and 4×4 securities offer respectively 1% and 1,25% gross per annum, if held for the maximum period envisaged by the two issues.
On the other side of the Atlantic, there are similar instruments too: inflation-indexed US Treasuries (TIPS) “offering a reasonably priced hedge against upside inflation surprises,” says a Pimco report. US TIPS currently price in a return of inflation to the Fed's 2% target in 12 to 18 months. Also there are the And F (Exchange Traded Fund) whose underlying collects inflation-linked bonds
The alternatives: corporate bonds with double-digit yields, private debt and infrastructure
“We need to think of yields in real terms higher than inflation levels, which is not easy and to which we are no longer used” Pescatori continues. “For example, there are, immediately available on the most liquid bond markets, the corporate issues: maturities of less than one year have a yield of 7%, while those of more than 2 years the yield is already over 10%. Also there are real markets, including the market private debt, market more detached from the inflationary market because it is not mark to market, moreover it tends to be floating. Obviously, since we are dealing with medium-small companies, we need to be careful because, if deflation were to appear in addition to inflation, they are the most exposed to a negative economic curve. Speaking of real-type investments, there are those too infrastructural, given that inflation is mainly due to the energy supply side: we are starting with an energy transition fund that invests precisely in energy efficiency programs for large public buildings.
Commodities market: anticipator of inflation?
Another way to potentially fight inflation can be to invest in commodities. The price of raw material it has a relatively strong connection to inflation. However, it is a volatile market and therefore to be handled with care. But it can also be read as a forerunner of inflation trends a decline from the peaks of quotations, because the markets are also pricing in an economic slowdown.
Secondo Edward Fusco, founder of LD capital, “The decline in the prices of raw materials can anticipate the trend of inflation, and their decline can bring some breathing space to the economy. But we must not think that with this there could be a change of course of the two central banks in the next two months at least” said a Tie-Intermont. “Moreover, both the commodity market in general and the gold market in particular are very volatile and therefore a very prudent allocation is needed”.
Lombard odier, an independent Swiss banking group, which also considers direct investment in European residential real estate as a tool to reduce portfolio volatility and combat the impact of inflation, however distinguishes between commodities and gold. “We remain underweight on gold, too influenced and driven by inflation, market uncertainty, rate hikes and dollar strength” he says in his report. Instead, he favors exposure to a diversified package of commodities. "Unlike the past 20 years, commodity markets are now more supply-driven, meaning prices could remain buoyant even if demand slows," the report said. “In particular, we appreciate i industrial metals, which continue to benefit from government investments in the development of infrastructure projects and the economic transition towards the decarbonisation of energy sources, a multi-year trend. Even the reopening ofChinese economy should support the question.”
