Don’t downsize your dreams

How investors can guard against lasting inflation

2021/11/04
tiny car with money

Summary

How can investors reposition their portfolios in the face of a persistent rise in consumer price inflation? In part two of a two-part paper, we share the results of our proprietary analysis into the asset classes that may provide an optimal inflation hedge.

Key takeaways:

  • Given our view that inflation is set to last longer than many market watchers expect, we conducted our own analysis into how different asset classes performed in a range of inflation environments
  • Our research found that with moderate inflation (2%-4%), equities were the top-performing asset class, and sovereign and corporate bonds both generated decent positive annual real returns
  • Perhaps surprisingly to those who consider gold to be the ultimate hedge against inflation, gold’s returns were mixed across different inflationary environments
  • Commodities consistently generated solid positive returns in times of high and rising inflation, but their longer-term outlook may be obscured by the transition away from fossil fuels

In our view, global central banks and many investors underestimate the probability that consumer price inflation may turn out higher than expected and last longer than currently priced into financial markets. While we don’t foresee a return to the price environment of the 1970s, we think medium-term inflation risks are nevertheless skewed to the upside, and we may see a more regular overshooting of central banks’ inflation targets over time. This is contrary to the consensus scenario (and the view of most central banks) that the rise in inflation is just a temporary phenomenon – a perspective that we think is a bit too sanguine. To learn more about the eight factors driving inflation higher, read Inflation: beyond transitory.

As a result, we believe investors should take a closer look at how their portfolios are positioned to hedge against inflation. In seeking to determine some of the optimal ways to provide this hedge, we conducted our own in-depth analysis of a range of asset classes. Explore the four sections below to see the results of our findings.

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Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Equities have tended to be volatile, and do not offer a fixed rate of return. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bond prices will normally decline as interest rates rise. The impact may be greater with longer-duration bonds. Credit risk reflects the issuer’s ability to make timely payments of interest or principal—the lower the rating, the higher the risk of default. Investments in commodities may be affected by overall market movements, changes in interest rates, and other factors such as weather, disease, embargoes, and international economic and political developments. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

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