The Bank of England has said inflation could hit 4% before the end of the year, prompting investors to reconsider their portfolio allocations to lessen the impact on their investments.
In August, CPI inflation rose 1.2 percentage points to 3.2%, the biggest jump in inflation the UK has seen in almost a quarter of a century.
A survey of 100 wealth managers and institutional investors across the UK, France, Germany, Italy and Switzerland carried out by Tabula Investment Management found that 95% are already investing in products that provide an element of protection against inflation.
Nine out of 10 said they expect to make changes to their asset allocation to increase inflation protection.
“The world has experienced 30 years of benign inflation, due primarily to the deflationary effect of China and other emerging countries such as Vietnam and Indonesia entering the global labour market. However, we are beginning to see a reversal of this trend. This, combined with a shift to autarky as nations become increasingly inward looking, is leading some to suggest that the current period of higher inflation may persist,” says Tabula CEO Michael John Lytle. “Professional investors have acknowledged this and are taking action to provide some protection against inflation for their portfolios.”
Slowing recovery
Central banks are mostly on the same page when it comes to inflation – with the majority giving off the message that it is transitory and that the need for emergency stimulus to boost economies is pretty much over.
According to Craig Erlam, senior market analyst for the UK and EMEA at Oanda, despite signs that the recovery is slowing, there is confidence that it will bounce back, as will price pressures.
“While that message doesn’t appear to have shifted, investors don’t appear as comfortable,” he says. “Perhaps the case for buying the dips is diminishing in a world where central banks are planning to pare back stimulus due to higher inflation rather than economic strength. Or maybe a winter of discontent is becoming more of a worrying reality as energy shortages trigger massive price increases.”
Erlam also questions whether the list of risk factors are starting to weigh on investor sentiment as they, along with central banks, remain unsure about what the coming year holds.
“Whatever is happening this week in markets, it doesn’t look like abating any time soon,” he adds.
Good for inflation protection
Dzmitry Lipski, head of funds research at Interactive Investor, says that investors should consider some exposure to inflation-linked bonds and real assets, like commodities and infrastructure, to protect against high inflation.
He cites two funds that are well placed for high-inflation environments – Capital Gearing Trust and the WisdomTree Enhanced Commodity ETF.
Capital Gearing Trust is a multi-asset portfolio made up primarily of bonds, equities and property. It does, however, have some small holdings in infrastructure, gold and cash, as well as index-linked government bonds.
“The trust has been managed by highly-regarded investor Peter Spiller since 1982 and has delivered positive total returns in 37 out of 38 years,” Lipski says. “Also, under his tenure the trust has been a great preserver of wealth in bear markets, including the dot-com crash and the Global Financial Crisis and, most recently, during market sell offs in 2018 and 2020.”
Meanwhile, the WisdomTree Enhanced Commodity ETF covers major commodity sectors, including industrial and precious metals, energy and agriculture.
“We like WisdomTree Enhanced Commodity ETF as a satellite holding as part of a well-diversified portfolio,” explains Lipski. “The fund is well positioned to benefit from the current market climate and potentially deliver higher real returns. Its effective cost management and lower risk profile gives the strategy a competitive advantage against other funds in the sector. Historically, investors turned to commodities as a source of portfolio diversification and hedge against rising levels of inflation.”
