Investors have traditionally flocked to gold and other commodities during periods of high inflation, but with much of last week’s spike already priced in, is such a hedge necessary?
UK inflation spiked to 2.5% in June, ahead of the expected 2.2% forecast by analysts and a leap from the 2.1% recorded for May.
At 2.5% it is also the highest level it has reached since August 2018.
The drivers behind the rise, according to the Office for National Statistics, were transport costs and increased prices for clothes, food and footwear. Companies have also faced challenges with stock and staffing levels because of the pandemic.
The UK’s inflation uptick followed a similar scenario in the US, where inflation rocketed to 5.4% – way ahead of expectations.
Luke Hickmore, fixed income investment director at Aberdeen Standard Investments, says: “Markets are still supported by central banks putting more money in and even with all the ‘tapering’ talk, it is anticipated that the amount of liquidity central banks will pump into markets will remain high, with another $1.5trn likely before the end of 2021.”
For investors, he adds, the key lies within the real yield.
“There will be good opportunities to ‘buy the dip’ in credit markets – most likely in high yield. We will keep higher yield strategies to the fore as well and we are hanging on to the last of the ‘exiting lockdown’ trades – trades that will benefit from lockdown exit, such as airports and airlines, cruise ships and holiday resorts,” he explains.
On the fence
Despite inflationary concerns across markets, investors are yet to make tangible changes to their portfolios, according to trading platform Stake.
A snap survey of its international investors revealed just 20% had made changes to their portfolio in response to the jump in inflation figures, while 55% said they don’t consider it to be a threat to their current portfolio.
“While inflation is a factor investors are paying close attention to, we are seeing a considered and fairly strategic response, with a number of investors looking for ways to leverage the opportunity that inflation could present,” says Andrew Dengate of Stake.
“For example, the tech sector enjoyed a massive year in 2020, frequently dominating Stake’s most-traded stocks. However, the value of buy trades has decreased in H1 2021 with some of the volume appearing to shift into sectors such as mining and materials, that have historically performed well during periods of higher inflation.”
For Alistair George, chief investment strategist at Edison Group, the reignition of the inflation debate because of the UK and US figures could see investors take a ‘wait and see approach’ for the time being.
“While we remain of the view that these high readings will ultimately prove transient, we believe inflation uncertainty is increasing alongside growth risks and uncertainty over the policy response to the pandemic as the Delta variant spreads,” he says. “Given that valuations for global equity credit markets are relatively rich at present, this may give investors pause over the summer.”
Gold resurgence
In the first two weeks of July, however, investors appeared to make a dash towards gold as inflation and the rise in cases of the Delta variant of Covid-19 fuelled market jitters.
According to Capital.com, gold was the top-traded market for seven out of 11 trading days between 1-15 July 2021, marking a significant shift in behaviour from the previous month.
“The rise in the price of gold this week may be a suggestion that some traders think that this temporary inflation aberration may last a little longer than central bankers expect,” explains David Jones, chief market strategist at Capital.com.
“The Bank of England this week struck a more cautious tone, with the deputy governor for banking and markets suggesting that the central bank had underestimated the rapid bounce in inflation. I don’t think this worry is going away anytime soon and it is something that could deliver some market volatility as the year goes on.”
He adds: “Investors may have become complacent at the relative calm we have had this year and, if history teaches us anything about markets, it is that it seldom stays like that for long.”
