A new report is urging pension plan sponsors and other institutional investors to ensure the resilience of their portfolios in a number of different inflationary scenarios.
The report from Mercer argued inflation rises spurred by the coronavirus pandemic and widespread monetary easing are balanced by several disinflationary forces, like globalization. Geopolitical tensions, however, could upset this balance.
“Grudges in inter- and intra-national politics also continue to grate, with tribalism threatening to undermine the gains of globalization. As a result, though financial markets have seen stellar performance, investors should consider ensuring their portfolios are resilient to inflationary scenarios going forward.”
While geopolitical issues may make investing in the surging economies of developed nations more risky, the report concluded that demographic figures make opportunities in China and India particularly promising to institutional investors seeking to prepare for various inflationary regimes.
“An Asian century is upon us, fuelled by a spectrum of structural forces: demographics, urbanization, innovation, technology adoption, domestic consumption growth and intra-regional trade integration.”
The report highlighted the role that actively managed, unconstrained emerging market equities can play in inflation-resilient portfolios, noting investments in mainland Chinese equities will outperform allocations focused on Hong Kong equities. In terms of Asian private equities, institutional investors may gain insulation to various inflationary regimes through exposure to emerging technologies.
The report also noted that commodities provide inflation protection for many scenarios investment portfolios are frequently unprepared for. It also concluded that exposure to real assets and select equity strategies can be beneficial parts of long-term investment strategies.
“Floating-rate assets, such as private debt and structured credit, can remove expensive duration risk and access more attractive spreads in light of bond market headwinds for investors who can tolerate some illiquidity.”