There are multi-asset strategies whose active management can effectively protect capital against soaring prices.

While the progress of vaccination in the world’s major economies is finally pointing to the end of the pandemic and therefore a rapid rebound in economic activity, the specter of a return of inflation is already beginning to worry investors. Fortunately, while most of the usual means of protection seem of little use today, there are multi-asset strategies whose active management can effectively protect capital against soaring prices.


After 10 years of no price increase, inflation is once again the topic of the day. It must be said that the accelerated vaccination campaigns, massive quantitative easing of central banks and colossal stimulus packages finally point to a rapid recovery of the economy, after more than a year of pandemic and declining activity. GDP growth rates could thus reach 7% in the United States in 2021. Globally, growth could be at the same level and, even in Europe, where vaccine shortages are slowing vaccination programs, economic recovery seems only temporarily delayed and could reach + 5%. For its part, China is expected to grow by at least 6%, after being the only G20 country to have posted an increase in its activity in 2020 (+ 2.3%).


So the fears of the Japanese economy are gone! Faced with this economic explosion, investors are now worried about a runaway machine and a return to inflation in the 1970s and 1980s. In fact, more than 60% of people surveyed by the National Association for Business Economics believe that inflation is a greater risk today than over the past 20 years.

It must be said that governments are increasing stimulus plans to restart the economic machine as quickly as possible. In the US, President Biden has pushed through a gigantic $ 1.9 trillion plan, on top of the $ 2.9 trillion already approved under Trump. These stimulus plans thus represent 30% of US GDP.

As a result, the public deficit breaks new records, with a Debt / GDP ratio already reaching in the USA the level at which Greece was in 2008! And the situation is no better in other countries, like France, which is approaching the 120% mark, and even virtuous Germany, which has happily exceeded the 60% mark imposed by France. eurozone.


So, one can fear that central banks will give in to the temptation to spin the printing press and let inflation wipe out some of their debt. In any case, the central banks, led by the Fed, seem for the moment to be coping very well with this prospect of soaring prices and have already announced that they do not foresee a marked tightening of their monetary policy. . For fear of shattering the new economic momentum, they are playing time, confident (too much?) In their ability to intervene in time to avoid overheating. PRICES OF RAW MATERIALS However, judging by the evolution of commodity prices, we must admit that investors still have cause for concern. Thus, the price of a barrel of crude has doubled since May 2020 and the RICI index of agricultural products has climbed + 30% in the space of a year. And these are not isolated cases, as the graph below shows.

This increase is not limited to the usual targets of speculators, since even industrial metals have experienced similar increases, such as steel, which has jumped by + 120% since September 2020.


According to Nobel laureate in economics Milton Friedman, inflation is primarily a monetary phenomenon, triggered when the growth of the money supply exceeds that of the production of goods and services. By the simple law of supply and demand, when money is too abundant, its value decreases and the price of goods and services naturally increases.

As can be seen from the graph below, in the 1970s and 1980s, when there were double-digit inflation rates in the United States, the average money supply growth (M2) was 14 % per year. Today, fueled by massive monetary easing programs, M2 has grown by + 25.8% over the past 12 months and we can therefore understand the concern of some observers!


For inflation to take hold, rising prices must be accompanied by rising wages. However, during the last 30 years, the generalization of women’s work, the opening of borders and the arrival of foreign labor, as well as the globalization of the economy are all factors that have contributed to an increase unemployment and therefore slowed down wage growth.

Today, with the rise of protectionism, the relocation of businesses and the aging of the population, we may be at the start of a new era. Local labor needs could increase, as the labor force shrinks, which could trigger wage increases for workers.

Investors are all the same: they believe they will be able to react quickly at the first signs of a real rebound in inflation. And in the meantime, they stay invested in risky assets to ride the wave until the end. But that’s forgetting that at the end there are breakers and that when the wave breaks, it is often too late to get out …

Indeed, as the last few weeks have reminded us, at the slightest indication of a surge in inflation, the market reaction is immediate and results in very significant fluctuations. For example, in February, when 10-year bond yields rose some 40 basis points in 10 days, there were violent moves on the Nasdaq and a massive rotation of growth companies into value stocks. . Inflation is therefore not a phenomenon to which we can adapt after the fact. On the contrary, it must be anticipated, because when the trend turns, the movements are very large. The markets are likely to react with nervousness, triggering unpredictable movements in the main asset classes. And this start of inflation seems very close: within 6 months in the USA and at most 12 months in the other economies.


It is sometimes forgotten, but increasing purchasing power remains the primary objective of any investment. The main threat to purchasing power is inflation. So what are the assets that protect against prolonged price increases?

In normal times, bonds and short-term deposits offer the investor a real return. Unfortunately, central bank policy has put an end to this normalcy and this does not look like it will change anytime soon. Locking in its 10-year yield at current levels therefore does not provide effective protection in the event of inflation. The same goes for floating rate bonds, or FRNs, which have extremely low yields.

Very popular today among investors worried about their purchasing power, TIPS, or inflation-linked bonds, also offer only a partial defense. Indeed, their yield is still much lower than conventional bonds and it would take very high inflation to come out on top.

Gold, on the other hand, trades at high levels and is very volatile. As for real estate, it is not very liquid and requires specific know-how.

In theory, defensive stocks provide real returns. Unfortunately, after 12 years of a bull market fueled by continued falling rates, the stock markets are at stratospheric levels and trading at record multiples. However, the PE of equities tends to fall in the event of inflation. As can be seen from the graph below, we have never seen multiples greater than 20 when inflation exceeds 3.9%.



So what can you do to protect your capital against the inflation virus? The answer is that there is not just one miracle active, but several must be combined to obtain an effective remedy. Fortunately, not only does this vaccine exist, it is available and has been proven to work.

The answer is that there is not just one miracle active, but several must be combined to obtain an effective remedy. This vaccine exists and is reflected in a “Global Macro” type strategy which combines assets offering a real return such as stocks, bonds, currencies, commodities, listed real estate, alternative investments and derivative products.
There is not a single miracle active.
It is necessary to combine several of them to obtain an effective remedy.

By combining these investments which are weakly correlated with each other into a dynamically managed portfolio, it is possible not only to protect capital but also to beat inflation by 5% per annum.

This type of strategy combines the advantages of a traditional asset allocation fund, in terms of regulation, transparency and liquidity, and those of a hedge fund, in terms of flexibility and variety of sources of performance.

NB: Unless otherwise indicated, data is as of 02/28/2021 and the rankings indicated have been made in the Citywire universe of Global Macro funds