Inflation: running amok
After decades of below-target inflation, the world is in unfamiliar territory. Inflation is rampant across much of the world, driven by a perfect storm of excess fiscal stimulus in the US, disrupted labour markets, supply chain bottlenecks induced by the Covid-19 pandemic and, most recently, the war in Ukraine which has increased food and energy prices globally.
While some of these factors should wane, others could persist, leading to the prospect of sustained inflation.
To cool consumer demand and dampen wage demands, central banks are resorting to higher interest rates. Companies may respond to price pressures by adjusting their supply chains and increasing automation. There’s also the possibility of social instability as inflation disproportionately hurts lower income countries and households.
- Higher policy rates
- Reworked supply chains
- Social unrest
Against this backdrop, markets look set to have to contend with inflation for the foreseeable future. Investors wanting to protect their portfolios may want to consider some of these ideas.
Over the long run, inflation-linked bonds could outperform nominal government bonds if inflation exceeds expectations.
Loans with adjustable interest rates will be able to adapt more quickly to a rising rate environment.
Multi-asset portfolios can balance the upside potential of equities with the downside protection of bonds.
Many thematic funds have a growth bias, but defensive thematics can weather rate rises better. Select themes may benefit from longer-term trends with less interest-rate sensitivity.
Common value sectors include commodities and financials that generally do well when the yield curve is steepening.
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