Long reads

How to prepare investment portfolios for possible inflation

Marco Mottadelli

Marco Mottadelli

Head of Global Brokerage, Fineco Bank

After a long period of very low inflation in Western Europe and the States, a combination of factors has led to a rather sudden change. Eurozone inflation hit an estimated 3% in August, with one recent study estimating that Britain could see inflation at 3.9% by next year. Much ink has been spilled over the past quarter about whether this represents pandemic recovery or something that represents a longer term turn in the market.

Catherine Mann, a recently appointed policy advisor to the Bank of England, cautioned about suggesting that the last few months represented a return to the stagflation of the 1970s. “We should always pay attention to historical data. But I think we ought to pay attention to some historical institutional differences as well,” she told an audience during a speech to an Australian University. Meanwhile an article from the Financial Times suggested the market was acting too sanguine about the possibility of serious and long-term inflation in the United States.

Opinions aren’t necessarily worth much – they are easy to give and there are so many in the market. What’s more impactful is what individual investors decide to do in light of these confusing and sometimes conflicting thoughts around inflation. What does it mean to inflation-proof a portfolio – and what does that mean in practice? This at one point was considered basic financial hygiene, but there are now multiple generations of investors who have never had to seriously consider the consequences of when cash is worth less and less each year.

Diversification is the key to preparing for different market conditions. It’s more simple than ever to use a single platform to access a number of investments, each designed for different market conditions. One traditional inflation hedge is gold – although its price has not always been invertedly correlated to the value of cash – which is now simple to access through different exchange traded funds. Other funds from asset managers are specifically designed for inflationary periods or long-tail events with the ability to increase allocations if concerns about inflation grow.

Other types of investments might become less attractive if inflation persists, at least with their current rates of return. Sovereign bonds are a particularly problematic investing for those believing inflation will last for a period time, as interest rates across the development world are near all-time lows. With the interest rates close to or negative for certain sovereign bonds, they represent a particularly unattractive investment if you believe the baseline inflation will be far above this line.

Further afield are newer types of investments, such as cryptocurrencies, that some believe may offer inflation protection. These are still generally not available through direct investing platforms, although funds featuring digital assets may soon become available in the United Kingdom, pending regulatory approval. Property and certain types of real estate trusts are also used by some to protect against inflation, although these can be complex with several layers of fees.

The great news is that a modern combined investing, banking and saving platform such as the one from Fineco has many tools that allow investors to both keep track of changing economic data and also then quickly make portfolio adjustments to react to how they believe the market will change. This also can mean shifting from one jurisdiction where inflation remains stubbornly high to another where prices are more stable. You don’t have to have all of the answers, but it’s now easy to adjust strategy as the market shifts – whether than means more or less inflation in our future. 

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