The rapid restart, supply chain disruption and scramble for gas is creating an inflationary Big Squeeze... whatever next and how to adapt? Whilst we would like to think inflation will be transitory rather than persistent, events are making that thinking look wishful. Our market update webinar will take stock of what's happening and why, and how to position portfolios from an asset allocation perspective.
To join the discussion on macro and market outlook, we are delighted to welcome Karim Chedid, CAIA, Director and Head of Investment Strategy for iShares EMEA.
1. What's driving "The Big Squeeze" - rapid restart, pent-up demand and supply shortfalls: how does this play out?
2. We assess the outlook against the "triangle" of growth, inflation and interest rates
3. We look at market regime, and portfolio resilience and vulnerabilities in an inflationary world
Please join us on Wed 27 Oct at 1030am
Read the article in full (5 min read)
Following the post-COVID restart, there would necessarily be an inflationary spike, from base effects alone. Central Banks’ core thesis was that this spike would be “transitory”, rather than “persistent”.
However, the combination of pent-up demand, supply chain disruptions and an energy crisis suggests that inflation could prove more persistent than transitory.
We look at the numbers and how this informs the “big picture triangle” of three key macro factors: growth, inflation and interest rates.
Finally, we outlined potential interventions in portfolio positioning from an asset allocation perspective. Nominal bonds are known to be structurally challenged in an inflationary regime, and propose real asset exposure instead. Within equities, we would propose an income/value bias.
Regiser for our 3q21 Review & Outlook: The Big Squeeze
Money market funds, and their exchange-traded equivalents “ultra-short duration bond funds”, are an important, if unglamorous, tool in portfolio manager’s toolkit.
They can be used in place of a cash holding for additional yield, without compromising on risk, liquidity or cost.
Money market funds are intended to preserve capital and provide returns similar to those available on the wholesale money markets (e.g. the SONIA rate that replace LIBOR).
How risky is a money market fund?
Money market-type funds hold near-to maturity investment grade paper. Their weighted average term to maturity is <1 year. They therefore have very low effective duration (the sensitivity to changes in interest rates).
Compare gilts which are seen as a low-risk asset relative to equities. The 10-11 year duration on UK gilts (all maturities) means they carry a higher level volatility compared to cash (which has nil volatility). On the flip side, their longer term also means they have higher risk-return potential relative to cash and ultra-short bonds.
By contrast, money market type funds have some investment risk as they hold non-cash assets, but given their holdings’ investment grade status, short term to maturity and ultra-short effective duration, they exhibit near-nil volatility.
Platform cash, fixed term deposit or money market fund
From a flexibility perspective and a value for money perspective, there's a clear rationale to hold money market funds, rather than platform cash or a fixed term deposit.
Our Money Markets fund research paper that looks at 4 low cost money market funds sets out why
Why does the fund structure make sense? Find out more in our CPD Webinar on Introduction to Collective Investment Schemes