Hands-up anyone who made substantial changes to their investment portfolio in the last 3 months.
While this is clearly tongue-in-cheek, it is a relevant point. Inflation is higher than it has been for four decades, and it is unlikely many investors were positioned three months ago exactly how they wanted to be, considering what we now know. And a lot has changed. The quantum of the rise in inflation is stunning in itself…and it is going higher.
For those of you that follow our commentaries, you will know that Algebris has been shouting ‘inflation’ from the rooftops for more than 6 months. Now with energy costs soaring, few people can have remained oblivious to the initial effects. Too many numbers are being thrown around by market participants, but everyone gets the bigger picture. Inflation is the highest it has been for more than a generation. The Fed and Bank of England have started to act, raising short term interest rates. It is probably too much of a step change for the ECB to act quickly but even it turned hawkish at the last meeting.
Taking a step back to just observe the highest inflation rates in a generation (see chart below), combined with the lowest interest rates in a generation, it is obvious that the world should not have the lowest interest rates in a generation. This is the end of the monetary experiment that we have seen post Global Financial Crisis. There aren’t many traders in investment banks or wealth managers currently managing portfolios, or selecting funds, who have experienced inflation. This will require a change in thinking and portfolio positioning.
Perhaps the most important question for investors is, ‘What can I invest in that yields more than inflation’? Even if we assume inflation falls closer to 3%-4% by the end of the year as some large Covid related base effects roll-off, there aren’t many assets yielding above that. In addition, with QE likely to be reversing, there is still the chance of a further re-pricing downwards for a lot of bonds.
Importantly, sub-ordinated financial bonds were never part of the QE programs, so should not miss the lack of a central bank 800lb-gorilla-buying-programme. Additional Tier 1 securities now yield >5% while European bank equity (those without Russia exposure) also yield >7%. There are deep pockets of value in global banks (European banks in particular) and financials in general, that benefit from inflation and increasing short/long term interest rates. There aren’t many sectors that offer this.
This document is issued by Algebris (UK) Limited. The information contained herein may not be reproduced, distributed or published by any recipient for any purpose without the prior written consent of Algebris (UK) Limited.
Algebris (UK) Limited is authorised and Regulated in the UK by the Financial Conduct Authority. The information and opinions contained in this document are for background purposes only, do not purport to be full or complete and do not constitute investment advice. Under no circumstances should any part of this document be construed as an offering or solicitation of any offer of any fund managed by Algebris (UK) Limited. Any investment in the products referred to in this document should only be made on the basis of the relevant prospectus. This information does not constitute Investment Research, nor a Research Recommendation. Algebris (UK) Limited is not hereby arranging or agreeing to arrange any transaction in any investment whatsoever or otherwise undertaking any activity requiring authorisation under the Financial Services and Markets Act 2000.
No reliance may be placed for any purpose on the information and opinions contained in this document or their accuracy or completeness. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained in this document by any of Algebris (UK) Limited , its members, employees or affiliates and no liability is accepted by such persons for the accuracy or completeness of any such information or opinions.
The distribution of this document may be restricted in certain jurisdictions. The above information is for general guidance only, and it is the responsibility of any person or persons in possession of this document to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. This document is for private circulation to professional investors only.
© 2022 Algebris (UK) Limited. All Rights Reserved. 4th Floor, 1 St James’s Market, SW1Y 4AH.
