How hot is the inflation pot
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March 2021
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How hot is the inflation pot
If the start of 2021 led markets to question the no inflation forever, the debate has been hotting up in February, with the US 10Y inflation breakeven reaching its highest level since 2014. As the reflation trade continues, our key convictions are:

Still prefer equities to bonds, keeping a tilt towards more cyclical markets (Japan and EM Asia)

Stay risk-on in credit markets to benefit from central banks’ umbrellas and increase the tilt towards SRI in bonds

Start building hedges against inflation risk with breakeven and more generally with an investment approach that tests each investment case against a possible rise in inflation
Monthly convictions
Source: Amundi, as of 20 February 2021. The table represents a cross-asset assessment on a three- to six-month horizon, based on views expressed at the most recent Global Investment Committee. The outlook, changes in outlook and opinions on asset class assessment reflect the expected direction (+/-) and the strength of the conviction (+/++/+++). This assessment is subject to change. 
Play reflation through a value, cyclical tilt in EM and Japan
– While we believe a rebound in economy should support rotation towards Cyclicals and Value stocks, there is a rising consensus on this trend. As a result, investors should focus on sound businesses and strong balance sheets with a preference for value vs. growth, as a multi-year rebalancing trend. 

– In the short term, any sign of deceleration in economic activity may pause the rotation, but we believe this will be temporary and further reinforced by a steepening of the yield curve and an interest rate rebound.
EM Equities
Difficulties in vaccine production and spread of Covid-19 variants affected some EM but this does not alter our long-term constructive view on the region, with an expected growth of 5.7-6.5% in 2021. Improving economic and earnings momentum coupled with attractive relative valuations vs Developed Markets are bright spots. 
In the heterogeneous EM world, we continue to favour EM Asia, a region that maintains a solid recovery pace, with China and India displaying strong potential and PMI numbers.

Japanese Equities
We remain positive on Japan in light of an improving global economic situation, given the market’s cyclicals and industrials tilt.
The country’s improving shareholder focus and growing return on equity is not yet appreciated by the market: It is still attractively valued compared to its historical P/E ratio and to the US market and has more room to catch up.
0.18% OGC*

0.20% OGC*

0.05% OGC*
Positive on US inflation, steeper yield curve expectation
 The huge fiscal support, the Fed’s ongoing support coupled with the difficulty in finding skilled labour and the pent-up consumer demand bode well for a steeper US yield curve and rising inflation expectations.

We downgraded our view to become cautious on US duration and upgraded our stance on US inflation.
US inflation & FRN
Market’s inflation expectations rose to their 5-year highs in February in the US, driven by hopes of an economic recovery, strong fiscal stimulus and continuous success of the vaccination programme.
We believe this uptick reflects a long-term regime shift due to the upcoming normalization of the economy. On breakeven, we upgraded our view on US 10Y and are positive on TIPS.
UST 10y yield broke 1.5% at the end of February and is up more than 60 bps over the last 3 months. The 5-30 yield differential increased significantly to reach 160 bps and we believe the US curve can steepen further in the coming weeks.

Risk-on stance in EUR credit with a focus on quality
 CBs’ accommodative policies have decoupled markets from the real economy. Investor search for yield has boosted prices for some pockets in the credit market, but appetite for EUR IG remains strong.

 On the other hand, cheaper and low quality assets may fall even more.
Euro Investment Grade Corporate
Euro Credit continues to be supported by ECB’s quantitative easing. We expect limited spread tightening, but the asset class still provides some yield in an environment where rates are expected to remain lower for longer. This warrants a continuous search for carry in EUR IG, particularly in the BBB-rated category. We prefer shorter dated debt in general, in line with our defensive stance on Core Euro duration.
0.20% OGC*
Gold should maintain its spark 
 We reiterate our constructive view on gold, despite the recent correction, as we believe the metal should benefit from a prolonged dovish stance of central banks in the long run.
Precious metals: Gold
Recently, hopes of additional stimulus, particularly in the US, raised economic growth expectations and supported the rise of UST yields. We believe the Fed would continue to promote easy financial conditions to support economic recovery but would accept a mild increase in yields. Thus, we maintain our positive view on gold owing to the Fed’s dovish stance and abundant liquidity. 
If growth is weaker-than-market expectations, the ensuing uncertainty should be positive for gold.
For these reasons, we reiterate our call for having structural gold exposure as it should do well in our base and downside scenarios, as long as CBs maintain easy monetary policies.
0.15% TER**
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*Ongoing charges - annual, all taxes included. For Amundi ETF funds, the ongoing charges correspond to the Total Expense Ratio. The ongoing charges represent the charges taken from the fund over a year. When the fund has not closed its accounts for the first time, the ongoing charges are estimated. It compares the annual total management and operating costs (all taxes included) charged to a fund against the value of that fund’s assets. Transaction cost and commissions may occur when trading ETFs.
**The TER is a measure that compares the annual total management and operating costs (all taxes included) charged to a ETC against the value of that ETC’s assets. Transaction cost and commissions may occur when trading ETCs.

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