This alternative asset manager is telling investors to prepare for higher inflation ahead

Published Sun, Feb 21 20217:57 AM ESTUpdated Sun, Feb 21 20216:03 PM EST

The Covid pandemic helped accelerate several important trends that will have important investing impacts in 2021, according to Thomas Friedberger, who runs the Paris-based Tikehau Investment Management. Among the ramifications he sees from the changing landscape are accelerated inflation and a battle between the U.S. and China as the latter seeks to get its currency more universally recognized for use in global transactions. The virus fallout , in which global supply chains were crippled due to government restrictions, also is expected to force countries and companies to re-shore activities, resulting in higher input costs. Investors in this climate will find good returns in traditional inflation hedges as well as companies with strong cash positions, he said. "2020 showed the extraordinary vulnerability of a global economy," said Friedberger, who is co-CIO and co-CEO of the firm, which manages 28.5 billion euros, or about $34.5 billion in U.S. currency. "When something goes wrong that's not on the agenda, like the Covid crisis, then everything gets fragile and vulnerable. It shows the need to be in a more sustainable growth system." That type of system takes many forms, from companies that rely less on debt for growth to those that have stronger bases to get through a time when rising expenses squeeze profit margins. Friedberger said the new landscape also will see continued tensions between the U.S. and China, even with the advent of a new U.S. administration. Former President Donald Trump had a mostly contentious relationship with China, imposing heavy tariffs in an effort to close the trade gap and make the global playing field more level for American products. "Our feeling is that it's not only about pure economic tensions. That's more the tip of the iceberg," he said. "It's a much deeper issue." Part of the battle will involve the need for the U.S. to issue more and more debt to pay for its stimulus program at a time when China is trying to expand use of the renminbi. While Friedberger doesn't expect that Chinese currency to pose a major threat to the dollar's standing as the global reserve currency, he thinks pressure on the greenback will push inflation in the U.S. Global central banks have been trying to fan what they consider to be healthy levels of price pressures following a decade of mostly muted inflation. The Fed has said it will not raise interest rate s even if inflation somewhat exceeds its 2% target. "Central banks … will prefer to see inflation starting before acting," Friedberger said. "We know that once inflation has started, it's pretty complicated to stop it. The inflation won't be the runaway type the U.S. had seen in the late 1970s and early '80s and in fact will emanate from higher growth "and a lot of firepower with regard to consumption," he added. Investors will need to change allocations to benefit. "Real assets are probably a good hedge against inflation," Friedberger said. "Short-duration instruments in the fixed income are probably the best way to fight inflation, and from the perspective direct lending is an interesting value proposition. In equities, it's going to be all about investing in companies that have enough organic growth to actually cope with margin compression." He also said investors should look out for governments deeming more industries as "strategic" meaning that they'll be asked to reshore activities, which will result in higher labor costs.

The George Washington Statue at the Federal Hall National Memorial on Wall Street across the New York Stock Exchange on January 27, 2021.

Timothy A. Clary | AFP | Getty Images

Among the ramifications he sees from the changing landscape are accelerated inflation and a battle between the U.S. and China as the latter seeks to get its currency more universally recognized for use in global transactions.

The virus fallout, in which global supply chains were crippled due to government restrictions, also is expected to force countries and companies to re-shore activities, resulting in higher input costs.

Investors in this climate will find good returns in traditional inflation hedges as well as companies with strong cash positions, he said.

"2020 showed the extraordinary vulnerability of a global economy," said Friedberger, who is co-CIO and co-CEO of the firm, which manages 28.5 billion euros, or about $34.5 billion in U.S. currency. "When something goes wrong that's not on the agenda, like the Covid crisis, then everything gets fragile and vulnerable. It shows the need to be in a more sustainable growth system."