Ron Temple
Co-head of multiasset and head of U.S. equity at Lazard Asset Management
From an asset allocation perspective, 3% to 3.5% inflation means lower multiples on equities. It means we’re going to have sustained higher bond yields. It probably means higher spreads on credit. And it’s also a tougher environment for private equity, which relies on a lot of leverage. I don’t think private equity will be a bad investment, I just think the manager selection will be a lot more important. And, last but not least, it’ll be an environment with a lot of dispersion, which should be good for more hedge-fund-oriented investments. Also, in a higher-inflation environment, you’d expect infrastructure assets and other real types of assets to do quite well.
Michael Buchanan
Deputy chief investment officer at Western Asset Management
From my perspective, the “best store of value” question isn’t the same as the “best opportunity/highest-returning asset” question. I interpret “store of value” to be consistent with stability and preservation of capital. I think TIPS [Treasury Inflation-Protected Securities] at current levels have to be considered one of the more compelling stores of value. Here’s why: A holder of TIPS receives the real yield, plus the change in the consumer price index (CPI). Obviously, one of the most significant unknowns right now is inflation. Clearly the inflation we witnessed from the Covid economic disruption wasn’t simply transitory. But just how persistent will it be going forward? While housing data suggests we might be at or approaching an inflection point, the labor market and certain segments of the service economy are telling us a different story. With TIPS, an investor can take the inflation debate out of the equation and take comfort in earning a current real return of nearly 2%.
We haven’t seen real yields this high for over 10 years. The value proposition of TIPS is further enhanced by the fact that many of these securities are trading at a discount to par. Investors receive the CPI component of their return based on par, not based on the actual dollar price they pay. In other words, an investor who purchases a TIPS bond at 80¢ on the dollar is receiving a CPI payment based on 100¢ on the dollar.
Nouriel Roubini
Chair and chief executive officer of Roubini Macro Associates LLC
There are three solutions to the problems of inflation, debasement of currency, political and geopolitical risk and environmental risk.
Solution No. 1 is to have very, very short-term Treasuries that adjust in rates and don’t have the price action of long bonds.
Secondly, you want to be in TIPS, even if TIPS have not yet done well because inflation expectations are not yet de-anchored. And I think you want to go into gold and precious metal. Again, gold has not done well because you have tight monetary policy and a strong dollar. But if central banks are going to blink and wimp out, gold is going to rise in value. Gold is going to rise in value also because the enemies of the U.S. are subject to sanctions. China right now is worried they have a trillion dollars of reserves in dollars that they have to move to other things. If it’s euro, yen, it can be seized. The only thing that cannot be seized is gold. Of course, not in the vault in New York or London, but in Beijing or Moscow and so on.
And finally, appropriate types of real estate that are environmentally resilient, because real estate compared to equities in a recession does well—you have more pricing power for rents and so on. So, a combination of these assets provides you in an optimized way a hedge against some of these tail risks.
Abramowicz is co-host of Bloomberg Surveillance on TV and radio in New York.
This article was provided by Bloomberg News.