European institutional investors are adding protection to shield portfolios against medium-term inflation risk even though the short-term impact of COVID-19 crisis has been deflationary.
That's because the pandemic has accelerated the prospect of increases in production costs and prices of goods due to disruptions in supply chains. Investors are expecting that these developments will diminish the purchasing power of assets in the medium term. Added to that, investors believe central bank stimulus programs will last longer than they did in the aftermath of the global financial crisis.
"Central banks are faced with considerable uncertainty over the possibility of the second wave (of infections), and they will have to keep their policies very easy. We would expect quantitative easing (to continue) all through this year and next year," Stuart Thomson, senior strategist at Manulife Investment Management in London, said in a telephone interview.
Mr. Thomson said the stimulus that followed the global financial crisis helped banks get their balance sheets in order but did not bring back pre-crisis lending to the real economy.
European pension fund executives and money managers agree that the recent economic shock caused by the coronavirus has been prompted by a government-inspired lockdown of the economy rather than a banking crisis. They said they are now preparing for the return of inflationary pressure as early as in the middle of next year by adding inflation protection.