The market has entered a new phase of the cycle in which inflation will continue to shape monetary policies and the behavior of risk assets, while forcing many of the traditional rules of investing to be put under review. This is the main conclusion reached by the CIOs of Fixed Income, Equities, Multi-Asset and ESG, and Private Markets of M&G Investments, during a panel titled CIOs Investment Perspectives: Navigating the Aftershock- is inflation Back? recently organized by the firm for international journalists at its London headquarters.
Although risk assets have continued to show strength and fixed income has resisted better than in previous episodes of inflationary stress, M&G’s CIOs argued that investors must adapt to an environment characterized by higher interest rates for longer, structural changes in the economy, and new sources of risk stemming from geopolitics, public debt, and artificial intelligence. In this context, Gautam Samarth, multi-asset fund manager and panel moderator, highlighted that sharp dispersion within equities has heavily influenced investor results, while underlining the main change of the year as the sharp reset of interest rate expectations, following a period in which markets went from anticipating cuts to assuming that central banks will maintain a much more restrictive stance.
M&G’s Vision on Fixed Income
For Andrew Chorlton, CIO of Fixed Income, persistent inflation remains the dominant factor in understanding market behavior. He recalled that, five years after the end of the pandemic and following the impact of the invasion of Ukraine, “developed economies have still not managed to fully control inflationary pressures.” In his view, markets have made the same mistake for four consecutive years by taking the Federal Reserve’s interest rate expectations as a proxy for the rest of the world, and being disappointed each and every time due to starting the years with overly optimistic forecasts.
The Fixed Income CIO draws two readings from this behavior. On one hand, the idea that “investors want rates to be lower because that is supportive and good for everything, without recognizing that we are still in the middle of a battle against inflation.” On the other, that after the experience of 2022, controlling inflation has become “very personal” for central bankers, in the sense that they are not willing to “make the same mistake twice.” Chorlton pointed to Kevin Warsh, the new Chairman of the Fed, as an example; before taking office, Warsh maintained a stance more inclined toward lowering interest rates, but has now realized that “it is his reputation on the line,” adopting “a clear focus on fighting inflation.”
In any case, Chorlton believes that the performance of fixed income has been reasonably solid. Compared to the sharp adjustment experienced in 2022, an exercise that was practically flat in an environment marked by volatility, geopolitical tensions, and inflation “cannot be described as a bad result,” he stated. Furthermore, he argued that the government bond market currently offers a much more attractive starting point thanks to the existence of positive real yields.
His view is more cautious regarding corporate credit. In his opinion, spreads price in an excessively benign scenario, based solely on the continuity of the current context and low default levels. In contrast, the rates market already incorporates a large portion of known risks—inflation, fiscal policy, or political uncertainty—which is why he believes the risk-reward relationship is currently more favorable in sovereign bonds than in credit.
New Rules for Investing in Equities
For her part, Fabiana Fedeli, CIO of Equities, Multi-Asset, and Sustainability, argued that many of the traditional rules used for decades to analyze the stock market have stopped working. In her view, investors remain too constrained by the classic distinction between long and short-duration assets, when the market currently pays much closer attention to business fundamentals and major structural trends like artificial intelligence.
Fedeli recalled that just two years ago, there was a broad consensus that a higher-for-longer rate scenario should especially hurt tech companies, given they are long-duration businesses. However, the exact opposite happened. “The rule-of-thumb rules we all learned said that should not have happened, because high rates should have caused a bloodbath in long-duration tech, and that didn’t happen; in fact, it has continued not to happen,” she noted.
Fedeli believes the rise of artificial intelligence has profoundly changed the way the market values companies, and she believes the impact of higher financing costs will still take time to transfer to the companies leading this technological revolution. While she acknowledges that a time will come when the high investments required to develop AI will force many companies to turn to debt markets more intensively, she believes that point has not yet arrived.
However, she does identify macroeconomic risks that, in her view, the stock market still undervalues. Among them, she highlights the possibility that energy prices remain elevated for longer as a result of investment needs in energy security, infrastructure reconstruction, and inventory rebuilding. This scenario could end up weakening aggregate demand and affecting corporate earnings in certain sectors, though not uniformly. Therefore, she stressed the importance of maintaining long-term investment horizons and avoiding hasty decisions driven by concerns that may take years to materialize.
Inflation Protection: Key for Private Markets
The analysis by Emmanuel Deblanc, CIO of Private Markets, focused on the structural changes transforming investors’ perception of risk. In his view, the conversation around inflation has evolved significantly and now incorporates factors that until recently were barely taken into account, such as geopolitics, the sustainability of public finances, or potential regulatory and tax changes resulting from the growing debt of sovereign states.
Even so, Deblanc believes that “the value of having strategies and assets that provide protection against inflation has probably been undervalued and continues to be undervalued.” In his opinion, investors tend to associate these instruments solely with high-inflation scenarios, whereas they can also play a relevant role if, after an inflationary period, the economy enters a phase of disinflation or even deflation. What is truly important, he argues, is having assets capable of preserving purchasing power in highly changeable macroeconomic environments.
Another major debate raised by Deblanc revolves around the very concept of a risk-free asset. The executive questioned whether US government debt can continue to be considered the indisputable benchmark for global investors, especially in a context of high fiscal deficits and a sustained increase in public debt in economies like the United States or France. As he explained, inflation constitutes a way to erode the value of a currency without needing to incur a formal default, which forces a rethink of whether sovereign debt remains the appropriate benchmark for pricing the risk of all other assets.
Furthermore, he warned that governments’ tax collection capacity will increasingly become a determining factor in assessing investment risk. Rising tax and regulatory pressure could particularly affect regulated sectors, such as water or electricity, while differences between jurisdictions will tend to widen as some countries face greater difficulties handling the deterioration of their public accounts. In this new context, he concluded, understanding the risks associated with inflation, regulation, and fiscal sustainability will be just as important as analyzing traditional asset valuations.
