- Investors who've spent the last decade profiting from deflationary trades are vulnerable to an "inflation shock," said Marko Kolanovic.
- He recommends investors who want to reposition their portfolios for more persistent inflation reallocate bonds to commodities and stocks.
- The JPMorgan chief global markets strategist also said to buy value names.
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Investors who have spent the last few years profiting from deflationary trends may need to reposition to avoid an "inflation shock" to their portfolios, said JPMorgan's Marko Kolanovic.
The quant-driven chief global markets strategist said in a Wednesday note that with the end of the pandemic in sight, global growth, bond yields, and inflation are picking up. At the same time, it appears federal officials will continue easy monetary and fiscal policies. In just 2021, the new US administration proposed $6 trillion of new stimulus measures, he said.
Against that backdrop, investors who have made money from deflationary trades are vulnerable to inflation risks, Kolanovic said.
"For over a decade, only deflationary (long duration) trades were working, and many of today's investment managers have never experienced a rise in yields, commodities, value stocks, or inflation in any meaningful way," Kolanovic said.
The Federal Reserve has argued that any near term inflationary pressures will only be temporary, though Kolanovic said the question that matters most for investors now is whether they'll prepare for a more serious rise in inflation.
"Given the still high unemployment, and a decade of inflation undershoot, central banks will likely tolerate higher inflation and see it as temporary," he said. "The question that matters the most is if asset managers will make a significant change in allocations to express an increased probability of a more persistent inflation."
To reposition a portfolio for the risk of more persistent inflation, he recommends investors shorten duration and reallocate from bonds to commodities and stocks. Although commodity prices have been on a tear as of late, Kolanovic said they're cheap in a historical context: they're the only major asset class that has declined in absolute terms over the past decade. He added that commodity indices, such as the S&P GSCI, are "perhaps the most direct inflation hedge."
Within stocks, the strategist recommends investors buy value names and short low volatility style. Finally he said investors should be cautious ESG factors.
"Investors should be cognizant that by embracing ESG they introduced additional short inflation exposure into portfolios (e.g., via long tech and short energy exposure)," Kolanovic added.
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