Analysis: Nordic pension funds see soft landing for inflation, but remain cautious | New

Major pension funds in the Nordic region mainly expect inflation to return next year, albeit at a higher level, but investment policymakers are also on the lookout for the risk that things will go wrong. are not going so well, according to the views gathered by IPE.

Financial markets around the world have been frightened by rising inflation during 2021, as prices have been particularly sensitive to news that may affect monetary policy attempts to bring it under control.

Kristin Magnusson Bernard, CEO of AP1, said the Swedish state pension buffer fund expects inflation numbers to have a soft landing in 2022 with annual figures of around 2-3%.

“We believe that the supply chain problems will gradually ease and that the effects on commodity prices could possibly go against recent developments,” she told IPE, adding that the Components of national inflation were now key areas to watch – particularly the impact of rents in the United States.

But the SEK 431.5 billion (43.6 billion euros) pension fund still believes that inflation figures and rate developments do not necessarily go hand in hand, said Magnusson Bernard.

“We are absolutely convinced that the higher inflation tolerance and less forward-looking monetary policy strategy of the big central banks are more than empty words,” she said.

At Akademiker Pension in Denmark, investment manager Anders Schelde predicts that inflation will remain high until the supply-demand imbalance is partially resolved over the next year.

“But in the longer term, we expect inflation rates to come down as economic growth slows,” he told PEI.

However, the pension fund believes central banks have become more patient with inflation, he said, and therefore expects slightly higher inflation rates in the future compared to the levels. before the pandemic.

“Since February, the level and persistence of inflation has certainly surprised us, but overall we are not so worried about the long-term outlook for inflation,” said Schelde.

Rasmus Cederholm, CIO of Copenhagen-based AP Pension, also expects the inflation rate to drop next year and stay at a new level higher than the low inflation of the 2010s.

A combination of three factors is behind the very high inflation rates seen today, he said. COVID-related restrictions and an increase in household disposable income have boosted demand for goods, but Asia’s zero tolerance to the spread of the virus has meant waves of summer infection have resulted in plant closures, therefore less global manufacturing.

Third, Cederholm said, the sandblasted labor markets in the west mean the national warehousing and transportation sector cannot supply enough manpower.

“These three factors combined have led to higher global demand for goods than ever before, and at the same time, global supply chains have partially collapsed,” he said.

AP Pension did not fully expect the resulting upward pressure on prices, he said, so it had to raise its inflation expectations.

“We think we’re going to see an inflation level around 2%,” he said.

But Åmund Lunde, CEO of Oslo Pensjonsforsikring (OPF), said he believed markets were still too optimistic about how quickly the supply shocks created by the pandemic would unfold.

If stock markets were valued correctly, this implied that investors believed companies could pass cost increases created by bottlenecks on to higher consumer prices.

“It’s very close to what we call inflation, as opposed to a change in relative prices,” he said, adding that this also implied that central banks would not raise interest rates. real.

“Central banks are stuck between a rock and a hard place,” he said, knowing that their credibility depended on preserving the purchasing power of their currencies, but fearing that a rapid response to the rise in prices. inflation does jeopardize the recovery due to the fall in bond and stock markets. .

“In my 30-plus-year career, I have never been more concerned with the combination of macroeconomic risk, monetary policy and asset market pricing,” Lunde said.

In Stockholm, AP1 is not making big changes to its asset allocation due to the inflation outlook, according to Magnusson Bernard, who said the fund was well positioned to deal with rising inflation, although that she added that the team expected a frequent rebalancing.

“We continue to believe that taking risk will pay off for a while, although we expect a bumpier ride,” she said.

“We continue to believe that taking risk will pay off for a while, although we expect a bumpier ride.”

Kristin Magnusson Bernard, CEO of AP1

“From current market movements, we infer that a number of investors are forced to close long positions in fixed income securities due to tight risk limits.

“This opens up some pretty good opportunities for us as we are well equipped to manage risk and believe current market prices have moved ahead of future policy releases in some jurisdictions,” she said.

In February, Magnusson Bernard told IPE that AP1 was considering adding elements to its overlay strategy to seize investment opportunities resulting from the current uncertainty over the global inflation outlook.

When asked last week if this had paid off, she said, “We opened and closed positions in US interest rate futures during the year. We are happy with the results and will likely use similar strategies again. “

Akademiker Pension is sticking to its current asset allocation so far, according to Schelde.

“That said, we have our eyes riveted on the development of inflation expectations and on the development of the main messages from central banks,” he added.

Regarding the potential impact of rising inflation and future interest rates, he said: “The duration of our liabilities is quite high, and longer than the duration of our portfolio, but in the short and medium term. , this has no impact on our assets-liabilities. to a large extent, but we certainly take this into account when building our long-term strategic asset allocation portfolio.

Cederholm said that AP Pension’s strategic allocation is structured so that its portfolio is robust under different inflation scenarios.

“Nominal bonds are balanced by a strong allocation to real assets such as real estate and infrastructure, and in the equity portfolio, growth stocks are balanced by high quality and value stocks,” he said. he declares.

“Therefore, we are comfortable with our current allocation, and the surge in inflation rates has not resulted in concrete investment steps,” he said, adding that the fund. pension is keeping its eyes on 2022, where its expectation of a change in inflation dynamics “may give rise to tactical arrangements.”

Regarding the impact on liabilities, Cederholm said that AP Pension has essentially hedged this risk.

“On the part of our portfolio which is based on guaranteed benefits, we have largely hedged the interest rate risk.

Kristin Magnusson Bernard at AP1 (2)

“And on our insurance product in the event of loss of earning capacity, which has an integrated indexation of purchasing power, we cover to a certain extent the risk of rising inflation rates,” he said. declared.

He acknowledged that this also meant that the company would not take full advantage of lower provisions when interest rates rose or inflation fell, but said it was “very much in line with the risk that we have. want to take “.

Magnusson Bernard told IPE that modest increases in inflation and interest rates across the curve were to be expected during the later stages of a recovery, which was heading now the economy.

“That usually means still decent but unspectacular stock returns, and a more reluctant IPO market.

“It also opens up some interesting opportunities to play different currencies against one another, as the tightening of monetary policy will likely take place on different dates and at different rates in different countries,” she said.

“In contrast, an environment in which annual inflation hangs significantly above 5%, say, in combination with rapidly rising rates is about as unpleasant as it can be for most asset managers. “she said, adding that historically very few asset classes tended to behave well. in such situations – perhaps with the rare exception of commodities.

“But we attach a very low probability that that will happen,” she said.

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