“Be vigilant”: Man GLG hedge fund veteran Pierre-Henri Flamand warns investors of inflation 'storm'

A break in the clouds

Pierre-Henri Flamand, Man GLG’s CIO emeritus and hedge fund industry veteran, says the huge economic stimulus from governments to combat the coronavirus crisis is fuelling the threat of inflation, and is warning investors to “be vigilant rather than to relax”.

The unprecedented cash injections from central banks and governments this year to support economies suggest a “clear threat that we may be entering an inflationary decade”, said Flamand, a former star manager at Goldman Sachs and now senior investment adviser at UK hedge fund giant Man.

He believes the inflation threat far outweighs the challenges posed by the upcoming US presidential election, Brexit and structural problems within Europe’s economy, suggesting they are “merely rain clouds compared to the storm that is inflation.”

Such a period would bring major challenges for investment managers and asset portfolios, with any upward movement in the risk-free rate impacting risk asset valuations, Flamand said in a market note on Wednesday. 

At the same time, a sector rotation away from growth to value stocks and from duration-linked to inflation-linked products would spark further devaluations and volatility. Any direction shift could ultimately upend the prevailing make-up of the traditional 60/40 portfolio - “the tool which has helped investors cope so well with the previous deflationary regime”, he added.

Flamand – who joined Man Group’s discretionary hedge fund management unit GLG in June 2014 to manage its Value Opportunity strategy, having earlier run European-focused event driven hedge fund Edoma Capital Partners – also weighed up how the shifting political mood of recent years could yet fuel inflationary trends further.

He pointed to the sea-change away from globalisation – a major driver of disinflation over the past two decades – towards protectionism, reflected by the Brexit vote and Donald Trump’s presidency.

“If a more protectionist world does emerge, the prospect of a new era of tariffs and trade wars may well increase labour and input costs, driving inflation over the longer term,” said Flamand, who spent 15 years at Goldman Sachs, where he ran the Principal Strategies Group.

His deep-dive commentary also explored how the Covid-19 pandemic has “tilted the balance” between the private and public sectors, with the private sector bearing the brunt of the post-pandemic downturn, and state spending assuming a greater share of the economy, further pushing up inflation.

For now, the demand gap created by the Covid-19 recession will likely to maintain deflation in the short term, potentially skewing lopsided US equity markets further towards growth stocks over value names.

“But given the reliance of the US equity market on one factor, which is in itself reliant on low discount rates, investors must be wary,” Flamand added. “It may be impossible to avoid taking part in the growth bubble – indeed being early to call a bubble can be worse than not seeing one.”

Ultimately, though, conditions for a new, steeper inflationary regime - and a major rotation away from growth – are now set.

“Instead of dropping our guard, it is precisely this time which requires investors, and particular risk committees, to be vigilant rather than to relax,” he said. “Any risk committee worth their salt will be thinking carefully about the major dislocation that could be posed by inflation.”