Foreign media reported that Marko Kolanovic, chief global market strategist at JP Morgan Chase, who has been hailed as a “man of God”, warned that fund managers who have spent most of their careers profiting from deflationary trends need to change direction quickly or their portfolios will face “inflationary shock” risk.
Many managers today have never experienced a significant increase in yields, commodity prices, value stocks or inflation,” he said. The dramatic shift in allocations over the past decade toward growth, ESG and low-volatility styles, all of which are negatively correlated with inflation, has left most portfolios vulnerable to shocks.”
With the launch of the new crown (CCP virus) vaccine and government stimulus, the reflation trade has been in full swing since last November, including bets on rising U.S. debt rates, cyclical stocks and small caps. Kolanovic urged clients to adapt to the new trend in a hurry as the global economy reboots.
With high unemployment and a decade-long below-target inflation rate, central banks are likely to tolerate higher inflation and consider it only temporary,” he said. The most important question is whether asset managers make significant adjustments to allocations to reflect the rising likelihood of sustained inflation.”
Kolanovic believes that as data continue to signal higher prices for goods and services, investors will be forced to shift from low-volatility stocks to value stocks while increasing their allocations to instruments like commodities that provide a direct hedge against inflation. This trend is likely to continue into the second half of the year, he writes.
According to JPMorgan data, professional investors have not yet fully embraced the inflation reflation trade. In equities, for example, computer algorithms and hedge funds are currently holding below historical averages. “Rather than seizing the opportunity, portfolio managers may reposition their portfolios. The interaction of low market liquidity, systemic and macro/fundamental flows, and the sheer size of financial assets that need to be rotated or hedged against inflation risk could have a huge impact on inflation and reflation themes over the next year.”
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