Inflatie of financiële stabiliteit?

Markten worden geconfronteerd met de hoogste prijsstijgingen sinds de jaren zeventig van de vorige eeuw. De terugkeer van inflatie confronteert centrale banken met een ongewenst dilemma: inflatie bestrijden of prioriteit geven aan financiële stabiliteit? Wat zijn de gevolgen van dit beleid voor beleggers in bijvoorbeeld credit, high yield of EMD? We beschrijven vier mogelijke macroscenario’s en de bijbehorende mogelijkheden en risico’s voor obligatiebeleggers.

Uncertainty over inflation and central bank policy is likely to remain high during the first half of 2023 with a wide distribution of potential outcomes. Despite this, analysis shows that bonds already price in most of the downside risk and are expected to deliver favourable outcomes across a number of scenarios, as highlighted in the chart below.

Scenario analysis – A return to form for the role of fixed income

After spending over a decade trying to generate inflation, central banks are today confronted with the highest increases in prices since the 1970s. The return of inflation brings with it an unwelcome dilemma; combat inflation or prioritise financial stability. At the core of this dilemma is whether inflation is structural or cyclical. Whichever it is, and how central banks react, will be key to financial market returns in 2023 and beyond. At the time of writing, it is unclear which combination of outcomes is most likely and good arguments can be made for each scenario.

In the first section of this paper, we set out the arguments for the two types of inflation and provide an overview of the potential reaction functions of both the US Federal Reserve (Fed) and European Central Bank (ECB). The extent to which the Fed will lean toward price or financial stability as well as where inflation lies and how these variables will impact investment returns is then explored through scenario analysis in the second section. The scenarios tested include a soft landing in which inflation moderates, an inflationary bust leading to a hard recession and a milder recession in which the Fed responds with aggressive easing.

Significantly, the results also show core fixed income providing diversification benefits in “risk-off” environments. Out of the five more probable scenarios we have looked at, we only envisage negative returns across all major fixed income sectors for one, that of an inflationary bust. This could occur if inflation remains structurally high for longer and the Fed is forced to continue tightening policy aggressively.

Our conclusion based on this analysis is that fixed income valuations now look potentially attractive. High yield and investment grade credit spreads have not fully priced in the risk of recession, however, the high level of yields now available provide a good cushion to mitigate against the expected widening that would occur under a recession scenario. An increased allocation to bonds therefore may help investors to build more resilient portfolios.

Risk factors you should consider before investing:

• This material is not intended to provide investment advice or be considered a personal recommendation.
• The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
• Past results are not a guide to future results.
• If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease. Currency hedging seeks to limit this, but there is no guarantee that hedging will be totally successful.
• Risks may be associated with investing in fixed income, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.

Flavio Carpenzano is an investment director at Capital Group. He has 19 years of industry experience and has been with Capital Group for three years. Prior to joining Capital, Flavio worked as a fixed income senior investment strategist at AllianceBernstein. Before that, he was a product manager at PIMCO focussed on credit strategies. His early career also includes a role at the Bank of England as an analyst in the markets department. He holds a master’s degree in finance and economics from Università Bocconi. Flavio is based in London.

Peter Becker is an investment director at Capital Group. He has 27 years of industry experience and has been with Capital Group for five years. Prior to joining Capital, Peter was a managing director in the fixed income product management team at Wellington Management. Before that, he was a portfolio manager at Aberdeen Asset Management. He holds a master’s degree from The Ingolstadt School of Management. He also holds the Chartered Financial Analyst® designation. Peter is based in London.