‘Hyperinflation’ phase to normalise from mid-2022

The economic risk trends associated with 2021’s ‘hyperinflationary’ phase triggered by the COVID-19 pandemic are set to stabilise from mid-2022, as European manager Amundi Asset Management predicts a fall back into a Normal inflationary regime.

The firm’s latest blue paper, Resilient multi-asset portfolios in an inflationary regime, highlights how crucial inflation dynamics are for investors, portfolio construction, central banks and monetary policy, as investors have questioned the sustainability of current market levels amid more persistent inflation in this post-COVID-recovery phase.

After US CPI (Consumer Price Index) ended last year with indicators in the six to ten per cent range on average, Amundi has foreseen this trend persist in the first part of 2022 as inflation tops pre-crisis levels.

Moving into 2023, Amundi has also projected inflation to normalise with US CPI centred at 2.5%, as central banks continue to manage inflation expectations during a challenging time with the new Omicron variant and ongoing supply chain bottlenecks causing health and economic impacts to markets.

“Against this backdrop, multi-asset investors need to act and rethink their portfolios, making them resilient to higher inflation,” Matteo Germano, Head of Multi-Asset at Amundi, wrote in the paper.

“Targeting real returns becomes critical in a world of lower expected returns and higher inflation, and investors should be aware of the ‘nominal illusion’. To do this, investors should look at a broad set of asset classes that could prove resilient to inflation and help target real returns.”

In the paper, Amundi also revealed the large number of tools available to investors to alter asset allocations to suit a higher-than-expected inflation regime, with inflation-linked bonds and commodities named the “weapons of choice” to protect portfolios.

“In the FX space, commodity currencies are favoured if higher inflation originates from the commodity space,” Francesco Sandrini, Head of Balanced, Income & Real Return at Amundi, wrote in the paper.

“The Canadian dollar, the Norwegian krone and Australian dollar may play a key role, as well as some emerging currencies such as the Colombian peso and Russian rouble.

“Relative-value forex can prove useful when inflation pressures affect only some regions, as might be the case nowadays with different price dynamics between the United States and Japan for instance.”

Amundi’s analysis also said inflation numbers in countries such as the United States and the United Kingdom have reflected the persistence of key inflation drivers going into 2022, recommending investors to maintain exposure to inflation-linked bonds in these countries.