Hedge Your Portfolio Against Inflation
Let’s double down on inflation bets
GDP numbers are out and, as expected, they were worse than economists’ expected. Gross domestic product expanded at a 2% annualized rate following a 6.7% pace in the second quarter.
Wow… that is a serious slowdown in growth, but our readers shouldn’t have got surprised by this low number as we have been talking about stagflation for some time.
Now that we know that we are in a full stagflationary environment, let’s give you an insight into how our trading team is going to manage the portfolio to combat the macroeconomic picture.
Gold
Go buy commodities, any of them. As we fight against supply chain dislocation, commodities seems to be heading for the moon.
Gold is best known for being an inflation-hedge. History proved it time after time again. Just look how the price of gold skyrocketed everytime we got inflation throughout history. And we are talking about millennia here.
Before betting your house on Gold, you’d better read this article, so you get a heads up as to where the price of Gold is currently sitting and how it may have already priced in some inflation expectation.
Inflation-Protected Bonds
Although this option may not always be the best(in the U.K., long maturities means index-linked bonds are highly sensitive to rate risk), this year they lived up to the expectation. Also known as TIPS, they returned a nice 4% this year versus a 3% loss for nominal peers.
Real Estate
When prices in general rise, so does the price of land and therefore the rents. The conventional wisdom is that investing in property is a natural offset. REITs have returned some nice profit since we got in this inflationary environment, proof of that being the hot housing market.
Bank Stocks
In an inflationary environment, investors expect central banks to increase rates. This enables banks to charge higher loans, of course if the economy is healthy. A recent BoF survey showed that money managers are overweight in bank stocks, as higher loans lead to an increase in revenues.
To conclude with…
Everybody must do their own diligence on how to fight inflation. Central banks are lost and we, as investors, must find a way out of this toxic financial environment. Inflation erodes our buying power, but there are certain categories that benefit from inflation. Above, there are only a few.
But here is a piece of advice: getting in now may be too late…
“You don’t want to own fixed income. You do not want to hold that whatsoever because what they’re saying, what they’re telling you by their actions, is that they’re going to be slow and late to fight inflation and somewhere down the road, somebody will have to come in … and put the hammer down.” — a smart guy