“In the past decade we have become unaccustomed toinflation, while we have become accustomed to zero, if not downright negative rates, at least up to 5 years of maturity for bonds. From here on, however, a very different scenario opens up, due to various factors”. This is what Alessandro Fugnoli, strategist of the investment company Kairos, says in the latest episode of his monthly podcast "On the fourth floor".
“The first factor is the political will – continues Fugnoli – Central Banks they tell us that their effective target will no longer be 2, but substantially 3%, a level of inflation which, moreover, will most likely already be reached this year, if not exceeded. The Bundesbank tells us that Germany - always very attentive to inflation levels - will reach 3% this year. A similar level will also be reached in the USA, where this threshold could even be exceeded (if not this year, then next). It is therefore good to start thinking about inflation again, because taking just over zero as rates and having 3% inflation for 10 years means losing a third of purchasing power. So something very significant."
How to get organised? “The first thing to do – explains the analyst – is avoid very long fixed-income securities, from 10 years onwards. It is good instead focus on inflation-linked stocks, because even if they will be penalized by the bear market bonds, they will still be able to defend their purchasing power much better than fixed-rate bonds. It will then be a question of focusing on corporate bonds, high yield bonds, bank bonds (paying close attention to what you buy), however avoiding too long deadlines in this case too. It will then be appropriate to focus on real goods, starting with raw material, who will have ultra-expansionary monetary and fiscal policies on their side to support the economic cycle”.
A traditional defense against inflation is the Real Estate Market, “but we will have to be very careful – specifies Fugnoli – For example, the market for offices, shopping centers, industrial sheds it will be affected by the habit of working from home which has been spreading during the epidemic and which in some respects will also be maintained in the coming years. Investments in residential market, however, will be concentrated in countries that are growing significantly and constantly, especially in Asia. In Europe, on the other hand, with a stagnant demography, an abundance of supply and low nominal GDP growth, there will be fewer opportunities”.
Instead, there will continue to be good opportunities “on stock markets – concludes Fugnoli – which are already at high levels and which could be slightly affected by the increase in inflation in the form of multiples which in theory should contract, but due to the exclusion effect they will instead have significant positive inflows in the coming years. And therefore they should at least maintain their current levels and probably increase them as a result of monetary and fiscal policies which will continue to remain expansionary. Here we must concentrate above all on the sectors linked to the new energy policies (as supported by subsidies from governments), on those related to innovation and new technologies and also on certain value-related sectors, in particular banks and insurance companies. If all goes well and inflation stays around 3%, we will be able to dispose of a part of the substantial debt that has accumulated over the past decades and maintain a more lively level of growth than we have seen in the last decade. In all likelihood, the price of slightly higher inflation will be worth paying."
