Sit tight in the face of inflation

Investors have traditionally flocked to gold and other commodities during periods of high inflation, but with much of mid-July’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. Commentators point out that 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, the key lies within the real yield. There will be good opportunities to ‘buy the dip’ in credit markets – most likely in high yield. 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 do not consider it to be a threat to their current portfolio.

While inflation is a factor investors are paying close attention to, the market is seeing a considered and fairly strategic response, with a number of investors looking for ways to leverage the opportunity that inflation could present. 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.

Part of our role at Finura is to ensure Clients select an investment appropriate for their risk profile and objectives and, along the journey, help them to tell the difference between temporary volatility and permanent loss. This will include factoring the impact of inflation on portfolios. However, if you are holding a significant amount of cash or low yield investments, we would encourage you to have a conversation with your financial planner, who you can contact here.

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Source: Techlink