Top of Mind Time for a new playbook on inflation and active management?

Are fiscal and monetary policy setting us on a course for inflation? How has the COVID-19 crisis altered the backdrop for active management? Multi-Asset Strategist Adam Berger offers his take, as well as thoughts on real assets, value stocks, the technology sector and alternative investments.

Views expressed are those of the author and are subject to change. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional or institutional investors only.

This quarter, I focus on three topics:

  1. The path of the pandemic and related investment ideas
  2. Inflation, including three-year and 10-year expectations and portfolio implications
  3. Questions about active management in areas like defensive strategies, value, technology, and alternatives

As we approach the end of a very challenging year, investors continue to feel their way through an economic and market environment in which history offers limited guidance. In this note, I update my thinking about the pandemic and how investors should respond. Then I dive into two big questions that have come up in the wake of COVID-19: Are we heading for future inflation and do we need to rethink active management? On inflation, I describe what has changed since the pandemic began, offer my assessment of the likely outcomes, and provide a road map for thinking about a portfolio response. On active management, I address the performance of defensive equity strategies and value stocks, the dominance of technology, and the backdrop for private assets and hedge funds.

 

Investing during the pandemic: An update

Last quarter, I sketched out three scenarios for the disease and the economy. Path A (“Back to before”; 30% probability) assumes a return to pre-COVID activity in the space of a quarter or two, whether that’s the result of a successful vaccine or simply a gradual return to ordinary life without a spike in case counts. In Path B (“Protracted pain”; 65% probability), the current environment lasts for a more extended period with limited resumption in activity and continued challenges for the economy and the markets. And in Path C (“Tip of the iceberg”; 5% probability), everything that’s happened since early 2020 is still just a prelude to a major economic crisis.

I would argue that we are currently closer to Path B. There have been some indications that a vaccine may be coming, but also reasons to think it may take longer than hoped. Meanwhile, the market seems to be…

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