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El inversor de ETFs estará expuesto a los siguientes factores de riesgo: Riesgo de pérdida del capital invertido, al no existir ninguna garantía, como consecuencia de un movimiento desfavorable del Índice de Referencia, Riesgo de que el objetivo de gestión solo se cumpla parcialmente, Riesgo de contrapartida como resultado de la utilización de los instrumentos financieros (OTC) formalizados con un establecimiento de crédito. Se recomienda a los inversores que consulten la sección del folleto antes de invertir.

En la medida en que cumpla con la legislación aplicable, ninguna entidad del Grupo Société Générale acepta responsabilidad alguna por las consecuencias financieras o de cualquier otra naturaleza que resulten de la inversión en este producto.

04 mar 2021

Two ways to position your portfolio for a rise in inflation

It’s one year since the pandemic shut down large parts of the global economy. Now, hopes that mass vaccination will accelerate economic normalisation have raised the prospect of inflation. Below we look at some potential drivers of inflation, and how investors can position themselves to benefit. 

The global economy is en route to recovery

Inflation prints fell at the height of the Covid-19 crisis, as demand collapsed due to lockdown restrictions and oil prices plunged. The trajectory of economic recovery remains uncertain, but a global recovery is undeniably taking shape, demonstrated by the subsequent sharp rebound in global PMIs. Inflation has been gathering momentum since the second half of 2020, in both the US and Europe.

Will inflation continue to rise?

Whether the ongoing normalisation in prices can be sustained over the longer term is a source of heated debate. For now, inflation expectations have built up, but ultimately, a sustained pick-up in inflation will have to be supported by higher incomes.

Central banks will also play a major role in determining inflation’s trajectory. The US Federal Reserve looks likely to maintain an accommodative bias and wait for a substantial increase in inflation before taking action. Current market expectations are for Fed tapering to start late this year or early next, with no rate hikes expected before 2023.

That said, it’s extremely difficult to predict the inflation rate over the year ahead, as the pandemic has dramatically changed the landscape for developed countries. The inflation outlook relies on governments’ ability to support local economic activity, while expansive fiscal policies will play a major role in helping determine a new inflation baseline.  

So what are our predictions?

In the short term, we believe the ongoing recovery in energy prices and global activity should support inflation. However, underlying domestic price pressures are likely to remain contained for now, particularly in sectors such as airlines and hospitality which still suffer from activity restrictions. Over the longer term, increasing budget deficits and escalating debt-to-GDP ratios could weaken currencies, supporting a rise in inflation. A continuation of the reversal of globalisation that started with the US-China trade war could also see prices rise further.

How can investors profit from an increase in inflation?

If you’re expecting inflation to rise, you have various options available to you.

Two of the best ways of profiting from rising prices are by investing in inflation-linked bonds – bonds whose coupon payments rise or fall in line with inflation – or inflation expectations strategies – which aim to provide exposure to the inflation breakeven rate (the difference between nominal bond yield and those of inflation-linked bonds). 

Which is the better option? That depends mainly on your outlook for inflation. Inflation-linked bonds are the conventional choice, but inflation expectations strategies may perform better at times when markets are underestimating just how high inflation could go. And crucially, thanks to their close to neutral duration, Lyxor’s inflation expectations strategies won’t suffer from the negative effect of rising yields on the price of underlying bonds.

Let’s take a look at some of the things that investors need to consider when allocating to these different types of investment.

Inflation-linked bonds

Investors need to assess several factors when considering how to allocate to inflation-linked bonds. These include:

  • The pace of activity (business surveys, etc.)
  • Inflation expectations (inflation breakeven rates)
  • Headline inflation drivers (e.g. the oil price)
  • The outlook for central banks’ action (the slope of the yield curve)

Analysing these factors will help you assess which countries to allocate to in a global portfolio, as well as deciding the appropriate duration risk exposure to take. But you also need to remember that the structure of inflation-linked bond markets can vary a lot from one country to another.

For example, the US inflation-linked bond market has a duration of 8.2 years, slightly above the average duration of 6.9 years for Treasuries. But the average duration of UK inflation-linked bonds is much higher – close to 21.1 years, while that of Gilts is around 12.6 years1.

This has big implications for investors. The longer until a bond matures, the higher its duration and the amount its price will fall when real bond yields rise. As a rule of thumb, every 1 basis point rise in interest rates will knock 1 basis point off the capital value of a bond per year of duration.

The long duration of the UK inflation-linked bond market means that its contribution to duration risk in a global inflation-linked bond portfolio will be higher than its market value weight. One way to reduce this risk is to constrain your exposure to a narrower set of maturities (for example, 1–10-year bonds) rather than taking an all-maturity exposure.

Inflation expectations strategies

Inflation expectations indices are designed to capture changes in the breakeven inflation rate – the difference between the yield of a nominal bond and an inflation-linked bond of the same maturity. To do so, a basket of inflation linked securities is bought while a basket of treasuries with matching maturities is sold, on a daily basis.  

Due to the non-linear relationship between changes in yield, return and fluctuations in market supply and demand, the magnitude of inflation expectations strategies movements relative to changes in breakeven inflation can vary. But again, there are some useful rules of thumb.

For example, we’ve found that a US inflation expectations strategy will move by approximately 8 basis points for every 1 basis point absolute change in the underlying breakeven inflation rate. This sensitivity is closer to a 4bp change for a strategy sensitive to eurozone inflation expectations due to the more complex structure of the inflation-linked bond market in the eurozone.

Cherry-pick your inflation exposure with Lyxor

At Lyxor we’re proud to be able to provide you with one of Europe’s largest and most extensive ranges of inflation-linked bond and inflation expectations strategies to help you fine-tune your portfolio’s inflation exposure2. Take a look at our offering in the table below.

1Source: Bloomberg, as at 17/02/2021.

2Source: Lyxor International Asset Management, as at 03/03/2021. Statements about Lyxor credentials vs. peers refer to the European UCITS ETF market only.


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Prior to investing in the product, investors should seek independent financial, tax, accounting and legal advice. It is each investor’s responsibility to ascertain that it is authorised to subscribe, or invest into this product. This document is of a commercial nature and not of a regulatory nature. This material is of a commercial nature and not a regulatory nature. This document does not constitute an offer, or an invitation to make an offer, from Société Générale, Lyxor Asset Management (together with its affiliates, Lyxor AM) or any of their respective subsidiaries to purchase or sell the product referred to herein.

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Lyxor International Asset Management (“LIAM”) or its employees may have or maintain business relationships with companies covered in its research reports. As a result, investors should be aware that LIAM and its employees may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see appendix at the end of this report for the analyst(s) certification(s), important disclosures and disclaimers. Alternatively, visit our global research disclosure website www.lyxoretf.com/compliance.

Conflicts of interest

This research contains the views, opinions and recommendations of Lyxor International Asset Management (“LIAM”) Cross Asset and ETF research analysts and/or strategists. To the extent that this research contains trade ideas based on macro views of economic market conditions or relative value, it may differ from the fundamental Cross Asset and ETF Research opinions and recommendations contained in Cross Asset and ETF Research sector or company research reports and from the views and opinions of other departments of LIAM and its affiliates. Lyxor Cross Asset and ETF research analysts and/or strategists routinely consult with LIAM sales and portfolio management personnel regarding market information including, but not limited to, pricing, spread levels and trading activity of ETFs tracking equity, fixed income and commodity indices. Trading desks may trade, or have traded, as principal on the basis of the research analyst(s) views and reports. Lyxor has mandatory research policies and procedures that are reasonably designed to (i) ensure that purported facts in research reports are based on reliable information and (ii) to prevent improper selective or tiered dissemination of research reports. In addition, research analysts receive compensation based, in part, on the quality and accuracy of their analysis, client feedback, competitive factors and LIAM’s total revenues including revenues from management fees and investment advisory fees and distribution fees.

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