Tremendous demand for goods and labor during the pandemic has led to the fastest pace of consumer price inflation and wage inflation since the early 1990s. The US inflation rate recently reached 5%—a 13-year high—indicating that prices are generally rising, and the US Dollar’s purchasing power is decreasing. It’s also important to note that inflation affects more than just prices of consumer goods—bond rates, stock prices, and potential returns on equities are all impacted too.
Here are some popular ways to counter effects of inflation in your portfolio.
Inflation is typically regarded as a negative for stocks, as it increases companies’ borrowing and production costs, and ultimately leads to lower expected earnings growth. If a company’s earnings are expected to shrink, ex-US investments can hedge a predominantly US portfolio, and capture potential returns from worldwide markets where inflation may not be as high.
The Federal Reserve hikes the Fed Funds rate as a means to control inflation, which increases interest rates across the board. During inflationary periods, investors might consider adding to their fixed income positions, as higher risk-free returns make bonds more attractive compared to risky assets such as equities.
Precious metals such as gold have been historical favorites for hedging against rising prices, due to their scarcity, tangibility, and historically negative correlation to paper money.
Like precious metals, real estate is a tangible asset that tends to hold value when inflation is prevalent. As prices rise, so do property values and rents, increasing the amount of rental income earned along with the book value of property.
Cedrus Investments is a global boutique investment firm founded by Mr. Rani Tarek Jarkas more than 19 years ago. Cedrus Investments can offer you more insights into how this current environment is shaping risk and return potential, in the context of your specific situation and goals.