[Discussion] Think twice before heavy inflation hedge: NYLIM

[Webinar: Inflation's Impact on Global Asset Allocation]




[Interview with Jae Yoon, CIO of New York Life Investment Management]

November’s inflation print, while mostly in line with market expectations, was staggeringly high. Headline inflation increased by 0.8% month-on month, moving prices 6.8% above last year’s levels. Removing more volatile food and energy costs, prices still increased by 4.9% year-on-year, well above the Fed’s 2.0% target.

Following another strong increase in U.S. consumer prices, the New York Life Investment Management's Multi-Asset Solutions team sat down with Mr. Jae Yoon, CIO of the firm to gather his thoughts on the investment threats and opportunities amid rising inflation.

▶What does the inflation data tell investors?

COVID-19-impacted sectors still account for a large portion of the U.S. inflationary pressures. However, price pressures have broadened. Importantly, housing prices (including rents), which make up approximately 40% of consumer price indices, continue to increase.

▶What does that mean for inflation in 2022?

Core personal consumption expenditure (PCE) inflation is likely to remain well above the Federal Reserve’s two percent objective. First, supply chain bottlenecks and strong demand to keep inflation elevated at least through Q1 2022, while rising home prices and tightening rental markets contribute to higher cost of shelter and housing through the year. The timing of any “peak” in inflation pressures will have important implications for the path of monetary policy and related market outcomes.

▶What are the Implications for monetary policy?

A strong employment backdrop and inflation data should push the Federal Open Markets Committee (FOMC) to speed up the tapering of asset purchases and potentially earlier rate hikes.

The Fed has a meeting next week, and we expect they’ll announce that quantitative easing will end by March 2022 instead of June. A faster taper gives the Fed the option to raise rates sooner. We expect the Fed’s dot plot to show some adjustment next week as well.

The timing and pace of rate hikes depends on what inflation will do in the months ahead. If inflation peaks early in the year, the Fed may be able to hold out for more expansive labor market improvement. That said, we believe the bar for this outcome may be high. While labor market conditions have room to improve, they have recovered meaningfully in recent months and the unemployment rate may soon fall below 4.0%. This means that, as long as labor market improvement doesn’t halt, and if inflation remains near current levels, then the Fed’s hands may be tied.

▶Increasing inflation risk has important market and economic implications.

We are concerned that without a commensurate rise in wages, the purchasing and investment power, individuals can suffer as prices rise. This would have meaningful implications for global demand.  

Perhaps a bigger concern is in a potential policy error. Rate hikes may do little to improve supply chain bottlenecks, but they can help reduce demand pressure, thereby alleviating a key contributor to price increases. If the economy is on its way to overheating, this demand-reduction tactic could be constructive. A higher cost of capital can smooth the economic cycle without causing a recession, and slower-but-consistent growth is valuable for business and investment planning. The Fed is highly attuned to the economic risks of its policy stance, and would certainly prefer not to slam on the proverbial economic brakes. That said, this is a difficult “soft landing” to orchestrate.

If inflation persists and the Fed is forced to raise rates sooner, the yield curve is likely to remain under considerable flattening pressure. If, by contrast, inflation subsides, the yield curve can re-steepen because the current aggressive expectations for rate hikes could be revised down. 

▶Are you concerned about more market volatility?

Absolutely. Uncertainty around COVID-19’s impact, economic growth, and policy are likely to prompt volatility in the coming months. For most of 2021, expectations around Fed policy were well anchored. The FOMC effectively communicated that tapering would begin at the end of this year, and investors were broadly comfortable with high but “transitory” inflation. Now, over the course of a few weeks, the arc of monetary policy has shifted. Investors should expect volatility in both the level and the shape of the curve as interest rate uncertainty prevails. We encourage investors to work with managers who can incorporate insights about the top-down economic cycle as well as bottom-up supply chain implications – and be nimble to address related opportunities and risks.

▶What else can investors do to navigate these risks?

Investors may want to consider a broader fixed income allocation. Our research shows that non-core bonds tend to outperform during periods in which interest rates are rising. Allocating to a broader set of fixed income asset classes, including floating rate securities, bank loans, convertible bonds, short-duration high-yield securities, and high yield municipal bonds, may generate opportunity amid rates risk.

In a recent global investor presentation (see video), our global investment teams highlighted that there is a tradeoff between focusing on inflation-hedging asset classes and focusing on total return. While inflation is a key risk for 2022, investors still expect a relatively shallow Fed-hike cycle ahead. With this in mind, we encourage investors to think twice before allocating heavily to inflation-hedge securities. In our portfolios, we are leveraging inflation-resilient strategies that also leverage durable investment themes such as infrastructure equity, broader geographic exposure, and non-traditional (ESG) risk metrics.


About New York Life Investments

With over $600 billion in Assets Under Management, New York Life Investments is comprised of the affiliated global asset management businesses of its parent company, New York Life Insurance Company (New York Life), and offers clients access to specialized, independent investment teams through its family of affiliated boutiques. New York Life Investments remains committed to clients through a combination of the diverse perspectives of its boutiques and a long-lasting focus on sustainable relationships.




Speakers' Biography

Lauren Goodwin

Lauren Goodwin, an Economist and Director of Portfolio Strategy at New York Life Investments, was named a 2020 Business Insider Rising Star of Wall Street. Her Multi-Asset Solutions team manages a combined $9.5B in assets (as of 12/31/20), including MainStay’s Income Builder Fund, Asset Allocation ETFs, and bespoke investment solutions.

Lauren’s work focuses on mapping global macro and capital markets trends to asset management strategy. She is responsible for economic and market research, asset allocation, and thought leadership, and is also a regular spokesperson for the firm at conferences and in television and print media outlets such as: Bloomberg, CNBC, CNN, and Barron’s.

Prior to joining the firm, Lauren held economist positions at JPMorgan, Wells Fargo, Frontier Strategy Group, and the OECD. She is a CFA Charterholder, graduated summa cum laude from the University of Southern California and holds a master’s degree in international economics from Johns Hopkins.


Michael DePalma

Michael DePalma is Head of Quantitative Fixed Income and manages Multi-Asset Income strategies for the MacKay Shields.

Prior to joining MacKay Shields, Mr. DePalma was the CEO of PhaseCapital, a boutique asset manager, where he managed systematic macro and credit strategies. Prior to joining PhaseCapital, Mr. DePalma was Chief Investment Officer for Quantitative Investment Strategies and Director of Fixed Income Absolute Return at AllianceBernstein where he managed multi-asset, global bond, multi-sector fixed income and currency strategies. Mr. DePalma graduated with a B.S. from Northeastern University and a M.S. from New York University’s Courant Institute of Mathematical Sciences.

 
Nadège Dufossé

Nadège Dufossé, has been Head of Cross-Asset Strategy at Candriam since 2014.

She began her career as a sell-side equity analyst at Exane BNP Paribas. She spent ten years at the company, focusing on a number of sectors and latterly recruiting and integrating new analysts. In 2007 she joined Candriam as an asset allocation fund manager, and in 2011 became a senior asset allocation strategist. Nadège holds a Master in Management with a specialization in Finance from the Grande Ecole HEC business school in Paris. She is a CFA Charterholder and holds a financial analyst diploma from the French Society of Financial Analysts.


Nicolas Forest

Nicolas Forest has been Global Head of Fixed Income at Candriam since 2013 and joined the Executive Committee in 2016. He is responsible for the Fixed Income strategy and Global Bond Funds as well as co-fund manager of the Total Return funds.  He is also teaching Fixed Income at the University of Paris Dauphine.

Nicolas Forest started his career as Assistant Structured Products Manager at CDC-Ixis in 2003, before joining Candriam in 2004 as Money Market Fund Manager. In 2008, he was appointed Head of Rates Strategy. Nicolas has master’s degrees in economics and finance from the University of the Sorbonne in Paris, and a bachelor degree in philosophy from the same university.

Simon Martin

Simin Martin is a senior partner and Head of Research & Investment Strategy at Tristan Partners. Simon brings a 25+ year track record of international real estate investment management to Tristan. He has worked with Founder and Executive Chairman/Chief Investment Officer Ric Lewis for over to 20 years and helped found Curzon Global Partners in London in 1999. Simon set up the firm’s strategy function and led the research team as it grew globally (as part of AEW).

He continues to focus on developing Tristan’s research-led investment approach. He works closely with the firm’s investment and asset management teams, and actively participates in the portfolio management process. He has served on the Investment Committee and has worked on every deal the firm has executed since inception. Simon also works closely on a day-to-day basis with the client development team to ensure that clients are kept fully apprised of developments in the market and the implications for strategy.

Prior to joining Curzon Global Partners he headed DTZ's Fund Management and Investment Strategy Group and worked for CB Hillier Parker's investment research team. Simon has also held a series of academic posts working as a researcher at Cambridge University (Property Research Unit) and at Kingston University (Real Estate Faculty) in London. Simon was latterly the CBRE Professor of Real Estate Finance at the Henley Business School and still lectures occasionally at a number of universities, including at Cass Business School and Saïd Business School.


[Disclosure]

The opinions expressed are those of the Multi-Asset Solutions team, an investment team within New York Life Investment Management LLC and not necessarily those of other investment boutiques affiliated with New York Life Investments.

Investing involves risk, including possible loss of principal. Asset allocation and diversification may not protect against market risk, loss of principal, or volatility of returns. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors, and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. No representation is being made that any account, product, or strategy will or is likely to achieve profits. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. You should consult your tax or legal advisor regarding such matters. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

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“New York Life Investments” is both a service mark, and the common trade name, of certain investment advisors affiliated with New York Life Insurance Company. The products and services of New York Life Investments’ boutiques are not available to all clients and in all jurisdictions or regions.