Man GLG’s Flamand urges market neutral tilt as inflation risk looms amid equities “euphoria”

Inflation is the next big risk facing the nascent economic recovery, and equity investors should be “exceptionally selective” in their exposures, tilting portfolios towards market neutral strategies that will help avoid excessive beta risk, says Man Group’s Pierre-Henri Flamand.

Flamand (pictured) – CIO emeritus and senior investment adviser at Man GLG, the discretionary hedge fund unit of London-listed investment giant Man Group – believes UK, European and Asian markets now offer attractive relative value stockpicking opportunities away from the “equity euphoria” seen Stateside.

In a recent market commentary, he said the surge in government borrowing globally during the coronavirus pandemic to keep economies afloat and stave off a downturn may ultimately prove “a significant drag on growth and earnings for years to come”.

As a result, investors should “look beyond the good news”, and instead construct their portfolios “with one eye on a potential inflationary future”.

Specifically, this means pivoting towards certain UK, European and Asian stocks, and away from “frothy” US equities whose prices are being driven up by “all the frustrated ambitions of last year”.

He said the ongoing vaccine rollout offers a “unique economic stimulus” which significantly eases supply conditions while also stimulating demand. This, in turn, will bolster cyclical and value stocks over the rest of the market, in particular, the growth “concept” stocks fuelling a large part of the recent euphoria.

He added that sources of volatility – such as Donald Trump’s presidency – have been taken off the table at the same time as fiscal stimulus – in the form of the new Biden administration – has arrived.

“With an ever-growing temptation for governments to inflate away their debt, we believe equity investors should think in relative terms, prioritising those regions offering relative value and higher growth rates,” he wrote in the recent deep-dive analysis.

Against a potentially-inflationary market backdrop, buyers can benefit from the risk management offered by active managers, and by being “exceptionally selective” when it comes to stock picking, said Flamand, who before joining Man GLG ran Edoma Capital, a European-focused, event driven hedge fund.

“For those that want to avoid excessive beta risk, market neutral equity funds could be an option. In our view, the combination of risk versus reward is offered away from the buoyant US: in Europe, in the UK in particular, and Asian equities,” he added.

“Not every fashionable stock is robust enough to cope with regime change. Above all, investors should tread carefully, and keep an eye on the main risk: inflation.”