“Inflation is taxation without representation.”
― James Thomas Kesterson Jr
3 min read
After almost four decades of falling interest rates, we are currently witnessing global inflation hit levels not seen for decades, caused by a number of factors, but largely driven by the emergence from the Covid pandemic.
In January US inflation accelerated to a year on year high of over 7%, the fastest rate since 1982. In Europe inflation is now at 5% and even in Switzerland it hit almost 2%.
Recent events in Ukraine, with the sanctions imposed on Russia, will only increase the impact on inflation numbers, given the significance of both countries in areas such as energy and grain production.
How long this inflation surge will last is probably the most pressing investment question in today’s market. After a decade of asset price gains administered via quantitative easing (printing money), investors are now having to seriously consider the prospect of going cold turkey.
Currently the market is anticipating between four and five rate hikes in the USA and the end of QE by midsummer. If inflation stays high, it is almost certain that these rate hikes (and possibly more) will occur in a bid to tame it, which will have consequences in turn for factor rotation and asset class performance.
Over time some of these inflationary pressures will ease, but we are unlikely to return to the lows of previous decades when we experienced negative central bank interest rates in both the EU and Switzerland.
The big question of course is how to invest in times of high inflation?
If we start with assets that suffer most from inflation, this must be cash. With inflation of 5% p/a, the purchasing power of €100 in a years’ time will be just €95, a guaranteed loss in real value.
The same applies for fixed income assets (bonds). Since bonds offer a fixed return over a given duration, inflation serves to reduce the real value of that return. For example, a bond which offers a yield of 3% p/a over 10 years will lose value in real terms with inflation of 5% p/a over the same duration. This is why we have seen bond prices fall (and yields increase) dramatically over the last three months in particular.
You are still able to protect yourself from the negative impact of inflation using a number of other asset classes, such as;
- Inflation linked bonds
- Real Estate
- Equities – especially high quality companies with strong dividends.
In summary, whilst inflation is negative for many asset classes, a well-balanced and diversified portfolio will protect the real value of your investments over time.
What is clear however is that if you stick to investment strategies that worked in the past (low inflation) environment, there is a high degree of likelihood that these are not going to work in the future.
We are able to offer a portfolio review service to make sure you are on track to meet your objectives. This can also help protect the real value of your investments from being eroded by inflation. Just get in touch today, you have nothing to lose and potentially lots to gain. Email or phone:
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One of our team will contact you and arrange a suitable time to discuss how our service works and how to get the ball rolling.