Pros, Cons of Wall Street's 6 Great Inflation Trades

Money managers are hiking bets on the great inflation trade of 2021, as the biggest risk to price stability in more than a decade rocks corporate boardrooms and Wall Street trading floors.

With supply chains and labor markets tightening anew, the latest Bank of America Corp. survey shows investors have rarely been this overweight assets that gain from rising prices or higher bond yields.

This month, 38% of clients are betting the inflation era is here to stay — higher level of conviction than the previous month.

Around the world, fund managers keep bidding up banks, leveraged loans and commodities. At the same time, the allure of gold, which has held up since the age of Babylon, is getting tested amid lackluster returns.

Here are the pros and cons for a handful of Wall Street trades.

What Your Peers Are Reading

1. Cyclical Stocks

Inflation that spurs rates higher is typically a boon for banks that can charge higher rates for deposits — so long as economic expansion is in rude health. Energy firms are also in line to benefit, although their gains may be capped by environmental concerns holding investors back from financing fossil fuels.

Banks claimed the highest allocation in this month’s BofA survey, with fund managers more overweight than at any time since 2018. Overweight bets on energy stocks are at the highest since 2012.

2. Leveraged Loans

A growing chorus of investors has been pitching leveraged loans as a shield against rising inflation and central bank tightening. Loans offer floating interest rates, which unlike the fixed payments on most conventional bonds, go up as benchmark rates do.

That’s helped returns on the asset class eclipse junk bonds this year in both the U.S. and Europe.

3. Real Estate

The conventional wisdom is that investing in property is a natural offset — if prices rise, so do rents, so long as landlords can act fast.

While owners of residential properties may be able to jack up rents quickly, commercial property developers tied into long-term leases risk getting left behind.