Wall Street benefits from Goldman to JPMorgan over new inflation era

Photographer: Michael Nagle / Bloomberg

It is the invisible force that is shaking Wall Street: an inflationary revival for the post-closing era that could turn everything in the world of investment between assets.

As America’s weakening with the latest economy drives market prices expectations to the highest in more than a decade, Bloomberg has solicited the opinions of top money executives about their make-or-break hedging strategies ahead.

One takeaway: the economy of trading stocks and real estate at interest rates would be turned upside down if the predictions of runaway prices could be believed.

Yet there is clear division. Goldman Sachs Group Inc. says that goods have proven their skills for over a century, while JPMorgan Asset Management is skeptical and prefers to hide in alternative assets such as infrastructure.

Pimco, meanwhile, warns that the market’s inflationary concerns are being misplaced as central banks may underline targets over the next 18 months.

The comments below have been processed for clarity.

Alberto Gallo, Partner and Portfolio Manager at Algebris

• Likes hedges, including convertible bonds and commodities

We do not know at this stage whether the rise in inflation will be sustained, but it is a good start. What we do know is that markets are completely misplaced. Investors have long been QE assets such as treasury, investment grade debt, gold and technology stocks. They were long Wall Street and short Main Street for a decade.

It will move to assets in the real economy such as smallness, financial and energy supplies instead of rates and credit, and this will yield a lot of volatility. We like convertible debt in value sectors linked to an acceleration in the cycle. We also like commodities.

We are changing from an environment where central banks have pushed the accelerator by keeping interest rates low while governments have pulled the trigger with austerity, to one where governments and central banks are working closely together.

Thushka Maharaj, worldwide multi-asset strategy by JPMorgan Asset Management

• Prefer real assets over commodity and price protected bonds

Commodities tend to be volatile and do not necessarily offer good inflation protection. In terms of index-linked securities, our study has shown that their long-term weight outweighs the pure inflation compensation that this asset offers. This is not the best asset on our inflation hedging list.

Should inflation rise and continue to rise – and we think this is a low probability – the recovery-focused equities sector offers a good investment profile. We also like real assets and the dollar.

We expect volatility in inflation, especially at the headline level over the next few months, mostly over the second quarter, driven by base effects, excessive short-term demand and disruption in supply chains caused by a long period of downturn. We see this as short-lived and expect the central banks to investigate volatility in the short term.

Christian Mueller-Glissmann, Managing Director of Portfolio Strategy and Asset Allocation at Goldman Sachs Group Inc.

• Index-linked bonds and gold warnings

We have found that commodities, especially oil, are the best hedges during a high inflation background. They have the best performance history in the last 100 years to protect you from unexpected inflation – one driven by scarcity of goods and services, and even wage inflation like the one in the late 60’s. Shares have a mixed record. We like value stocks as they are short-lived.

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

A scenario of sustained inflation of more than 3% and rising is not our basic concern, but the risk has certainly increased compared to the previous cycle.

Nicola Mai, Sovereign Credit Analyst at Pimco

• Say inflation could suppress the central bank’s target over the next 18 months

If we look at the short-term volatility introduced by energy prices and other volatile price components, we see that inflation remains low in the short term, with the central bank’s inflation targets in the next 18 months or so. The world economy has free capacity to meet the growing demand. If spending were to increase gradually over the years, it would probably end up in higher inflationary pressures.

We generally like curve strategies and think that US tips provide reasonable assurance for an inflation overrun. Commodities and assets linked to real estate should also benefit in an environment of rising inflation.