Wall Street Managers Oppose Inflation Hopes

The most recent data, which implies that inflation is peaking from a four-decade high, has euphoria flooding every corner of Wall Street. A game-changer for investing methods of all sorts, major money managers aren’t in the mood to celebrate and are betting that the globe will have to deal with high prices for years to come.
A hedge fund solutions team at UBS Group AG is playing it safe while JPMorgan Asset Management holds onto a record cash allocation in at least one of its strategies. The great inflation trade is anticipated to continue, and all indications point to continued strong pricing pressures for some time to come, according to Man Group quants.

Their cautious posture coincides with October’s price data coming in below expectations, which has sparked a significant cross-asset rally with companies like Citigroup Inc. wagering that the US central bank will tone down its hawkish predictions.

According to Kelsey Berro, a fixed-income portfolio manager at JPMorgan Asset Management, “the route to a soft landing”—where the Federal Reserve is able to bring inflation all the way back down to goal without inflicting significant economic harm—is still narrow. “While inflation should be headed in a downward direction, the rate of deceleration and the precise point at which it will level off remain highly unknown.”

Given the ongoing price pressures, JPMorgan Asset continues to invest in highly rated short-term debt. The chief investment officer of the company has long expressed concern about sticky inflation, which some had thought would decline following the pandemic.

Money managers at Man AHL, the company’s quantitative investment program, anticipate that trend-following strategies will continue to thrive. These strategies have been very successful after riding persistent inflation-driven pricing trends. The largest publicly traded hedge fund company in the world claims that a range of carry trades that profit from price discrepancies continue to be appealing as long as inflation persists.

According to Russell Korgaonkar, chief investment officer of Man AHL, “People were definitely very bullish about the prognosis for markets early this year, and it’s still very probable that they’re overly optimistic right now.”

The market’s estimate of inflation expectations is more consistent with the idea that future price growth will tend toward the Fed’s 2% target level. While factoring in a half-point Fed boost in December, traders predict that borrowing costs will peak next year.

Advertisement

However, according to Bank of America Corp., any money manager who anticipates a quick reduction in price pressures may be getting ahead of themselves.

According to Bank of America strategists led by Michael Hartnett, the “inflation stick” of swiftly growing services and pay inflation is here to stay. “Inflation will decline but stay above” averages from the previous 20 years.

In addition, investors have begun moving away from the security of cash, which they had previously used as a substitute for stocks, in what can be considered a bet that inflation is on the decline. According to statistics collated by Bloomberg, exchange-traded funds that mimic cash have experienced record outflows recently, with the $20 billion iShares Short Treasury Bond ETF (ticker SHV) experiencing the largest two-week outflow ever with about $5 billion leaving the fund.

However, money managers like UBS’s hedge fund solutions division are not yet prepared to abandon their protective stance.

Edoardo Rulli, deputy chief investment officer of UBS’s hedge fund solutions division, said, “We have been preparing our portfolios for this new era of higher inflation and lower growth and we expect risk assets to remain volatile.” With beta to equities and credit markets at historically low levels, “we remain defensively positioned.”

According to Ed Clissold, the head US strategist at Ned Davis Research Inc., it might be too early to invest in stocks or bonds once more. The company continues to be underweight stocks and overweight cash.

Clissold stated that cash yields “may stay attractive.” “Aggressive Fed easing probably won’t happen until something goes wrong. Lower risk asset prices, such as stock prices, would follow.

Read More Economic News Here

Advertisement