Preparing for inflation

Is your portfolio ready for the challenges of inflation?

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Preparing for inflation challenges

Inflation is the measure of how the general level of prices rise over time and how, as a result, the purchasing power of money falls over the same period.

Inflation has an important impact on investments as it erodes the real value of assets over time. Even low levels of inflation may diminish performance through what we call the ‘snowball effect’ or the compounding of inflation over the long term.

Impact of inflation over time

This chart shows the impact that 1%, 2.5% and 5% inflation can have on investments over 30 years
(right hand of chart) Annualized inflation of 2.5% over 10 years erodes the performance of an investment by 22%

How is inflation measured?

Inflation is estimated using price indices, this is based on baskets of goods and services – such a bread, milk, clothing etc. – which evolve over time as products on the market and consumers’ interests change. These baskets vary depending on the market:

CPI (Consumer Price Index)

HICP (Harmonised Index of Consumer Prices)

RPI (Retail Price Index)

The price of goods within the basket are measured monthly and any change in price across the basket will provide an indication of inflation levels. If the average price across the basket is increasing, this means inflation is rising, if the prices are decreasing then inflation is falling.

What are the main contributors to inflation?

  • Money supply: This is stock of currency and other liquid instruments available in a countries economy at any one time. If the growth of money supply increases faster than the level of productivity in the economy, price increases are likely as there is more money pursuing the same amount of goods and services.
  • Cost-push inflation: If there is an increase in the costs for companies, such as raw materials, the companies will pass this on to consumers through the sale prices.
  • Demand-pull inflation: This occurs when the economy is growing too fast and demand strongly outweighs supply, pushing prices higher.
  • Inflation expectations: Inflation tends to be self-serving. When discussing inflation targeting policies, the message from Central Banks is that “future inflation will be as important as past inflation”. However, current measures may jeopardise credibility.
  • Currency war: Currency depreciation makes import prices more expensive, leading to an increase in inflation[1].

What is AXA Investment Managers approach to inflation?

AXA Investment Managers was one of the first European asset managers to offer a dedicated inflation-linked bond fund in 1983. Since then, we have built up over 30[2] years’ experience as a firm managing inflation-linked assets for a diverse client base around the world, including supranationals, central banks, pension funds, and insurance companies, among others.

  • Experienced teams: At AXA Investment Managers we have a highly experience team dedicated to inflation-linked funds.
  • A diversified offering of solutions: Our range of strategies include single market, global and customised inflation-linked bond strategies which provide the desired exposure to real yields, breakeven and realised inflation.
  • Access to market insight and liquidity: Our significant size – over €27bn in inflation-linked assets under management globally[3] - provides us with access to liquidity, along with excellent market insights. 

Main risks associated with the asset class

  • Credit risk

  • Interest rate risk

  • Inflation risk

  • Derivative and leverage risk

  • Default Risk

  • Redex risk

[1] Source: AXA IM. For illustrative purposes only.

[2] Source: AXA IM as at 31/12/2018. Information about the staff team at AXA Investment Managers (AXA IM) is only informative

[3] Source: AXA IM as at 31/120/2018 including all inflation-linked assets within our Fixed Income platform.

 

This page is for informational purposes only and does not constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services and should not be considered as a solicitation or as investment, legal or tax advice. The strategies discussed herein may not be available in all jurisdictions and/or to certain types of investors. Opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. No guarantee, warranty, or representation is given as to the accuracy or completeness of this material. Reliance upon information in this material is at the sole discretion of the reader. This material does not contain sufficient information to support an investment decision.

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Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.

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