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Market view

“Inflation will prove to be permanent and uncertain” says Amundi



Investing in the big transformation. (Photo: Shutterstock)

Investing in the big transformation. (Photo: Shutterstock)

The asset manager goes into 2022 with three main beliefs: the scenario of a return to the 1970s will gain ground, central banks will be far more interventionist than the markets anticipate, and the concept of emerging markets as a homogeneous block is over.

The next few months will therefore be marked by three trends, according to Amundi.

First, a return to the 1970s. "This means that the scenario of secular stagnation is a thing of the past and that a return to the 'roaring twenties' is a pipe dream," says Pascal Blanqué, Amundi's head of asset management. "Global growth will return to its potential after the peak, as the cyclical recovery disappears. Inflation will prove to be permanent and uncertain, fuelled by supply constraints and the spread of shortages to all sectors of the economy. The desynchronisation of growth and inflation trends is coming back with a vengeance and will impact globalisation."

Secondly, central banks will, "contrary to market expectations of inflation", be even more interventionist in a context of slowing growth and increasing fiscal needs to finance the green and just transition.

Finally, "the concept of emerging markets as a homogeneous block is definitely over". For Amundi's strategies, the new dividing line will separate three worlds: countries with inflation and where central banks will act to control it; countries where central banks remain inactive; and China. "Investors should favour zones 1 and 3, where currencies should also appreciate against the US dollar, which will carry the weight of hyper-Keynesian policies."

Rising interest rates as the ultimate stock selection criterion

Trends that will constrain portfolio construction.

"In terms of portfolio construction, the challenges will be greater next year than in 2021. The key elements to be integrated will be yield, liquidity risk and exposure to growth and inflation risk," says Amundi, for whom investors will first have to start cautiously in terms of risk exposure and adjust it throughout the year, focusing on the resilience of the portfolio in the face of rising rates. "In a sequence of slowing growth followed by further stimulus, investors are likely to have a window of opportunity to increase the allocation to risky assets again and exploit the opportunities brought by an extension of the cycle."

Amundi also recommends favouring equities in less stressed areas--value stocks, Europe and emerging markets--which will be less sensitive to rising rates.

"Real rates will decide the fate of stocks whose valuations are excessive. Their inevitable rise will weaken growth stocks, which are generally more expensive. Selection should be based on earnings and pricing power levels, quality and valuation, in an environment of higher costs and rates. Amundi predicts an environment marked by a strong dispersion of returns between stocks. An environment that favours stock picking.

Emerging market equities should benefit from a catch-up effect in the next growth phase, as current allocations are lower than economic fundamentals allow while valuations look relatively attractive.

Playing the green transition and ESG themes

Finally, Europe should be favoured, as it is supported by the Next Generation EU Fund, "with a focus on the green transition".

More broadly, Amundi recommends exposure to ESG themes, "which are likely to have a significant impact on the risk/return trade-off".

"The net zero emissions initiative will have a significant impact on the market. Tackling inequality is likely to be the next big theme as it is an important objective of governments in the current recovery phase. Some mixed themes combining environmental and social aspects could emerge, such as just transition to tackle climate change in an equitable way, a particular concern for emerging economies."

This story was first published in French on Paperjam. It has been translated and edited for Delano.