Inflation-related funds and bonds are investments to be considered to earn after the coronavirus crisis: analysts expect short-term deflation, a gradual recovery in consumption and inflation.
Whenever there is a severe recession in an economic area, economists fear that there will be a backlash on inflation. Asymmetric shocks can be one of the causes of the increase in consumer prices. The United States and all of Europe are already suffering from the effects of the Sars-Cov-2 pandemic. To mitigate them, and to protect savings from future increases, more and more managers are looking at inflation-linked bonds and funds. A strategy that, in the long term, can be successful.
Coronavirus crisis: first deflation, then controlled inflation
If a deflation scenario can be expected in the short term, the future is worrying. In this crisis there are situations already observed in the past and there are two main reasons why there may be a surge in consumer prices, or inflation. In particular for monetary factors, such as the velocity of money, which has been in contraction in the United States since 1997 and which the various monetary policy measures (in particular quantitative easing) have exacerbated.
Then there are conflicts and wars that can inflame the price trend in the short to medium term. But we are not in a war scenario, with the destruction of physical capital: the factories and shops remain closed, but they do not disappear. Nor do we witness entire generations of working age sacrificed on the battlefields.
The consequence is that there will not be a consumption boom overnight, as if a war had ended. It will rather be a normalization, a first phase in which there will probably be reduced family budgets.
This process will be accompanied by a gradual reopening of the production framework, without creating that “bottleneck” effect that could trigger a rapid increase in prices. However, there are other aspects that need to be taken into consideration, especially the actions of the ECB and the Fed, and the misalignments between supply and demand of some essential goods (for example different food and agricultural products).
Investing in indexed Inflation-linked Bonds and funds: inflation will rise, long-term investments
For example, in Italy, the first European country to activate the lockdown, the price of the shopping cart has already risen by more than one percentage point, as noted by Istat (national statistical institute). And the outlook is on the upside for the coming months.
In this situation, many managers have found interest in inflation-indexed investments. As for example the Ctz and the Btp indexed to European inflation (italian bonds), which is estimated upward once the pandemic emergency is over. Or like the so-called inflation linked funds. And in fact, as explained by the financial research company Morningstar, in the first quarter of 2020, among the main categories of funds that recorded positive returns we find inflation linked in dollars, +3.44 percent. On the positive side, although with lower returns, those in euros.
The fear is the medium-term liquidity trap, a scenario in which the economic agent prefers to save rather than spend, with the consequence of a generalized reduction in consumer prices. However, as analysts of the Dutch bank Rabobank also point out, it is in the long run that there are more interesting prospects. The reason is to be found in the recovery of consumption and production activities.
That is, when the pandemic will be a memory and we will have to think about reconstruction, according to entirely new sustainability criteria. In such a context, inflation-linked funds can bring significant returns. Provided that they are part of a well-structured and diversified portfolio and that prudence criteria are used in every decision.