With inflation rising at the fastest rate for 40 years, investors’ thoughts are turning to the impact on their investments, and whether they can employ certain strategies to mitigate the damaging effects.
The Consumer Prices Index has risen by 7.8% in the 12 months to April 2022, up from 6.2% in March, meaning it can be difficult to find any one reliable inflation beating strategy at this moment in time, so a combination of strategies could provide the best option.
1. Index-linked Gilt
Index linked gilts offer defensive characteristics that you would expect from a gilt but have the added advantage of offering inflationary protection. Their interest payments and principal increase each year, in line with inflation.
Equities can offer a good hedge against inflation, especially with a well-diversified portfolio. Strong, quality companies could pass any increased costs to the consumer which means that their margins aren’t as squeezed as you may think and often take on debt when interest rates are low and inflation is high, as it reduces the overall cost of that debt over time.
Property is a good diversifier as its performance isn’t traditionally correlated to shares or bonds. One disadvantage is that the initial investment can be significant and may require further backing or borrowing. However, the cost of the debt is reduced over time by inflation and receiving regular rent income could offer a good hedge against inflation.
Infrastructure usually does well in an inflationary environment because typically, infrastructure own a physical asset, which has a long-term contract paying a set amount, which is usually linked to inflation. This means the income stream is linked to inflation which helps support the value of the asset and increase distributions to shareholders.
There are many types of infrastructure assets with some benefiting more from inflation than others. Currently, any infrastructure which has a link to energy prices (e.g wind farms) has benefited greatly, whereas toll roads conversely have seen lower volumes of use, which has hit income streams if they are not guaranteed by the Government.
Commodities add diversification and can protect against inflation. Given commodities are the likely cause of inflation, by holding them, their prices go up, which naturally increases the value of one’s holding. However, as they are subject to supply and demand factors, they can be very volatile and fluctuations in values are common.
There is no one strategy to protecting your investments against inflation and any approach will need to take into account your personal circumstances and is best effected with the help of a professional adviser. If you would like some advice and guidance in managing your investments, please get in touch.