After a sustained period of low inflation, prices of energy and food are rocketing around the world. Should investors be taking action?
Inflation goes global
For a while those of us living in Asia have watched from a distance as the US and Europe grappled with swiftly rising prices after a decade of low inflation hovering around 2%.
Inflation in the US has topped 5% over the last few months and reached a high of 8.5% in March 2022. The euro zone is not far behind recording an inflation rate of 7.4% in March, up from 5.9% in February. Consumers are struggling with soaring energy and food bills.
And now rising prices are starting to hit Asia too. According to figures from Bloomberg, price growth outpaced forecasts across Asia in March.
Inflation: the silent thief roars
If we didn’t understand inflation before, many of us have become well acquainted with what it means in recent months. It has been dubbed the silent thief, causing the value of money to fall as prices increase, and reducing buying power.
Except the silent thief is not so silent anymore. 7.4% year on year inflation means that the same basket of goods costs 7.4% more than it did 12 months ago. Inflation is shouting pretty loudly right now.
The Covid-19 pandemic and disrupted supply chains are in part to blame. The energy crisis in Europe as a result of the war in Ukraine have piled on inflationary pressure not only directly from rising energy prices but also due to the knock-on effect of the rise in prices of fertiliser, which is produced using natural gas. Supply has become a problem with many commodities. Grain production for example, already low, is falling and a lack of supply is pushing prices up. I recently replaced my boiler, and the supplier could only guarantee the quote for a week because the cost of materials is increasing so quickly.
What does inflation mean for investors?
Firstly, it’s important to note that although historically interest rates have tended to rise in tandem with inflation, this is not what is happening right now. The current Bank of England base rate in the UK is just 0.75%. Which is bad news if you have cash investments. If you’re earning interest of, say, 2%, on savings, in the face of 7.4% inflation, the real value of your cash is depreciating rapidly. This busts the common myth that cash is safe.
If you have large amounts of cash, now might be the time to think about shifting some of that money into safer investments. But which?
Bonds perhaps? Perhaps not. While in ‘normal’ times, bonds are generally considered to be a safe investment, as fixed income investments they won’t keep up with rapidly rising prices.
Equities, while often considered risky, could be the best option here. Historically, savings held in a diversified portfolio of shares have kept pace with rising prices over the long term. If you have a decent asset allocation strategy, it should withstand market cycles even if there is a short-term storm to be weathered.
Tangible assets such as gold, other commodities and real estate, tend to hold up comparatively well against inflation. Including some of these in your portfolio may be a prudent hedge. Certain exchange-traded funds (ETFs) include commodities, or you can select funds which hold stock in companies that produce gold, oil or other commodities. Buying a house or apartment can be problematic for many reasons but investing in real estate investment trusts (REITs) is an option for investors wishing to diversify into property.
While the current inflationary cycle was initially dismissed as transitory, the jury is now out on that. If we turn out to be entering an extended period of inflation reminiscent of the 1970s, this will be a difficult period for investors, whichever asset classes they have in their portfolios. As ever, the best hedge against downside risk is diversification in all its forms (by asset class, geography and industry) and staying invested for the long haul to ride out this investment cycle.
It’s certainly a good idea to chat through your situation with a qualified professional adviser and make sure you are investing via a trusted investment manager with a proven track record.
If you are concerned about how your investments might suffer in the face of inflation, get in touch to discuss your portfolio with one of our team.
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