What Inflation Means For Your Investments

(Forbes) - UK inflation soared to a 41-year high of 11.1% in the year to October 2022, according to the latest official figures from the Office for National Statistics.

The increase in consumer prices was higher than economists’ forecasts and piles extra pressure onto household finances already being stretched by a severe cost-of-living crisis.

For savers, making money has rarely been so much of a challenge. Double-digit inflation has a devastating impact on the real value of your money at a time when the best easy-access cash savings rates stand below 2%.

Faced with such a mis-match between savings rates and inflation, there are relatively few ways to safely preserve your wealth, let alone to help it to grow.

Investing is one option for savers looking to keep their money in line with – or beat – inflation. But remember that this is far from a risk-free option, with the potential for loss of capital along the way.

What’s more, the stock markets have experienced their own problems during 2022. Wherever investors look, fear is in the driving seat thanks to a powerful combination of post-pandemic global inflation, rising interest rates and the war in Ukraine.

Against a backdrop of steepling inflation – the Bank of England has already warned that annual prices could climb to as high as 13% before the end of this year – we’ve asked commentators to share their thoughts on how investors can best position their finances and protect their wealth during these challenging times.


David Henry, investment manager, Quilter Cheviot

During periods of rising inflation, real assets – namely stocks and shares, property and commodities – tend to perform better than cash or bondsGold, for instance, was the best performing asset during the 1970s.

In sterling terms, we recently looked at the performance of both UK and international stocks during periods of rising inflation since 1970 and found that UK markets tended to outperform global peers during these periods. UK stocks generated annualised returns of 12.9% on average during times of rising inflation, versus 7.7% for global markets.

This is most likely due to the UK market’s longstanding relatively high exposure to energy and commodity sectors. An obvious ‘hedge’ to the current cost of living crisis would be to hold shares in an energy producer. Our preference within the sector is currently for Royal Dutch Shell.

We also feel that Microsoft and Amazon continue to look well placed given their exposure to digital transformation for businesses, and migration to the “cloud”. 

Although such projects will have some natural exposure to the wider economic environment, we sense that they remain a priority for corporate customers and therefore such revenue streams are relatively well insulated from short-term economic headwinds. The P/E ratios of these businesses – a measure of their valuations – have contracted since the beginning of the year, and therefore look cheaper than they were at the beginning of 2022.

Zoe Gillespie, investment manager, Brewin Dolphin

Investing in equities offers the potential for capital growth and should provide real returns over the longer term.

At this stage, US stock market indices are down from their peak levels, with many more growth focused companies (ones which are anticipated to out-pace the performance of the stock market) still trading below peak levels despite a recovery in recent weeks.

Investing in quality US funds such as Artemis US Select provides diversified exposure to the region accompanied by the management skills of Cormac Weldon who is highly regarded. Alternatively, a tracker fund like the iShares S&P 500 offers a ‘passive’ approach to investing in the most influential stock market index in the US.

We also favour quality growth and income portfolios alongside certain infrastructure investments. In terms of the former, we like funds such as 91 Global Quality Equity Income, which offers a yield of around 1.5% and scope for growth from a portfolio containing global bellwethers such as Microsoft, Visa and Philip Morris International.

Vanguard Global Equity Income also seeks to provide a growing income from a well-diversified global list of companies and large holdings including Pfizer, Merck, Lockheed Martin and UBS.

JP Morgan Global Core Real Assets Investment Trust is also worthy of consideration. This invests in a diverse range of ‘real’ assets, including property, transport and digital infrastructure.

Adrian Lowery, investments analyst, Evelyn Partners

We would never recommend making sudden changes to one’s individual savings account or pension portfolio based on short-term economic trends. Just as both the globally-oriented FTSE 100 index and the more domestic-focused FTSE 250 index have shown resilience in recent weeks despite the negative news flow, so private investors should take monthly developments in their stride. 

However, it does seem we are entering into an era of higher inflation and higher interest rates that will endure into the medium term at least.

In such uncertain times, there are some steps investors can take to shore up returns. Equity funds that will reliably thrive in the current conditions are hard to come by, but some will do better than others and investors can also look to increase exposure to assets and strategies typically uncorrelated with equities.

Among equity funds, those that target income will provide investors with stable returns, whether capital growth disappoints or not.

Lazard Rathmore Alternative is an absolute return fund which means it looks to generate positive returns whatever the economic conditions. This one, which employs complex arbitrage tactics (a technique that takes advantage of price differentials), has an ambitious performance target of 6% to 8% above cash, with a low volatility, defensive strategy which should offer genuine protection in difficult markets.

Personal Assets investment trust is a capital preservation fund which has an emphasis on delivering inflation-beating returns. It won’t shoot the lights out during an equity bull-market, but it will help protect against sharp falls in markets while delivering ‘steady Eddie’ returns.

The fund’s equity strategy focuses on high-quality companies with the ability to generate strong cashflows consistently over time.

Rachel Winter, partner, Killik & Co

We often worry about whether we’re taking too much risk with our investments, but we should also worry about whether we’re taking enough. Low-risk investments such as cash and government bonds will generate a return similar to the base interest rate. At the moment, with inflation at 11.1% and the base interest rate at just 3%, low-risk investments have no hope of keeping pace with the cost of living.

Over a multi-decade time period, the stock market has generated an average annual return in excess of the rate of inflation. However, in our current high-inflation environment, some companies will fare better than others.

Some companies have had to absorb higher costs without changing their own prices, which has led to squeezed profit margins. Other companies, such as Swiss food giant Nestle, have managed to pass on higher prices to their customers.

Additionally, high inflation can cause consumers to try and rein in their spending. This can be good news for companies such as McDonald’s that sell lower-cost items.

Finally, the inflation we are experiencing now has largely been caused by rising energy prices, and this has made many governments very aware of the danger of overreliance on Russian oil and gas. As a result, there is likely to be more focus on energy independence. 

This should create a good opportunity for leaders in the renewable power sector such as SSE.

Rob Morgan, chief investment analyst, Charles Stanley

Protecting against high inflation is difficult for investors. Higher inflation – and higher interest rates to curb them – has an adverse effect on most asset prices.

The problematic scenario for investors is that a simplistic ‘traditional’ portfolio of equities and conventional bonds is not inflation-resilient.

This makes the investing environment difficult. On the one hand, investors are trying to hedge against, or even benefit from, higher inflation. On the other, a collapse in demand may lie ahead as higher prices take their toll. While better times will eventually return, investors do need to be prepared for choppy markets as these inflation and recession concerns ebb and flow.

There are a small number of areas that can help diversify a portfolio and build in some resilience to inflation including:

  • Infrastructure assets which often generate revenues that are contractually linked to rates of inflation.
  • Index-linked bonds pay an income, a component of which is linked to inflation.
  • Gold sometimes does well in inflationary times, particularly if interest rates are not rising sufficiently to compensate for stubborn inflation.

However, as with any investment, these assets can become more expensive if lots of investors are aiming to protect themselves at the same time – at which point their resilient properties diminish.

It’s therefore a really challenging scenario to get an inflation-beating return, and to an extent it can become a game of winning by not losing.

Ruffer Investment Trust has a good record of growing and protecting value through periods of market volatility. The managers have been banging the inflation risk drum for some time now, and the trust could continue to fare relatively well in the current environment with its positions in index- linked bonds, energy equities, gold and protection in the form of stock market options strategies.

FTF Clearbridge Global Infrastructure Income is a high-quality option for investors seeking high income and exposure to the broad and varied listed global infrastructure asset class.

Victoria Scholar, head of investment, interactive investor

Dividend stocks tend to fare better than the wider market in an inflationary environment. For example, BHP Group recently made a record payout to shareholders and reported its best earnings in 11 years.

As the Bank of England raises interest rates to combat rising inflation levels, the financial sector tends to enjoy a tailwind from rising net interest margins. As a result, banking stocks are often more in favour as price levels rise. However, they are also correlated with the macroeconomy, so may suffer if we enter a recession.

Oil stocks are faring well so far this year, with commodities among the key drivers of inflation since Russia’s invasion of Ukraine. However, it looks as though, going forward, commodity prices could be set to soften further as the global economy weakens and interest rates rise.

Therefore, it makes sense to look for recession-proof defensive plays such as the supermarkets or consumer staple stocks such as consumer goods conglomerates. It’s also worth looking at stocks or sectors that are ‘price makers’ rather than ‘price takers’, which means they can pass on higher costs to consumers without detrimentally denting demand.

Mike Stimpson, partner, Saltus

Fortunately, there are many investments that can help protect against inflation, either directly or indirectly.

The most direct way to protect against inflation is to invest in index-linked or inflation-protected government bonds – instruments where the payout is directly tied, or indexed, to the level of inflation and therefore keeping your spending power intact over time.

We prefer to buy US government inflation-linked securities as the UK versions are very expensive and offer little value. We use the CG Dollar fund from CG Asset management to access these securities, as this team is very experienced in this area and expert at selecting the best bonds to hold as prices and conditions change.

Another good, but indirect, way to protect against inflation is to own a diversified basket of high-quality equities in companies with strong market presence and good pricing power. Over time they should be able to raise their profits and dividends at a rate that keeps pace with the level of inflation.

There are many funds available that could fit in this area and we recently added the Royal London Global Equity Select fund to our client portfolios as a global manager with exactly the track record and flexibility needed to carry out the task of identifying the companies best able to achieve this goal.A classic asset class that can perform well in an inflationary environment is commodities.

The commodity with the longest track record as a store of value is gold, which has the benefit of also being widely understood and easily accessed. The iShares Physical Gold exchange-traded commodity (ETC) is one of the instruments we use.

Laura Suter, head of personal finance, AJ Bell

The good news is that investment markets are a good place to go for inflation protection. Many companies have the ability to pass on inflation-matching price increases to their customers, meaning their revenues can keep pace with rising prices. While it’s a long-term game, it means investing is one of the best ways to defend savers against rising prices.

However, inflation has been around for a while now. Some of the investments that help to protect investors’ money have become crowded, as many have piled into them purely for their inflation protection. Any investor entering the market now needs to assess whether the asset class, fund or stock has been over-bought.

Individual stock pickers will want to look out for companies that have pricing power. For example, brands that can pass on inflationary cost increases without losing customers, or those in the luxury market whose wealthy customers will be less affected by cost-of-living pressures.

Another area to look at is financials. We’re currently in a rising interest rate environment, which is when many banks thrive as they pass on the increases to mortgage and debt customers but don’t hand out extra interest to savers – improving their margins. Of course, during a recession there is a higher risk of people defaulting on debt, but banks will have factored this in.

James Yardley, senior research analyst, FundCalibre

With inflation this high, it’s impossible to protect your wealth completely, but you can do a few things with your investment portfolio to mitigate the impact. 

The best option offering protection from inflation is renewable energy investment trusts. Rather than try to pick just one, consider the VT Gravis Clean Energy Income fund, which invests in several and also has a target 4% yield – which could be attractive to income investors. 

Although not a perfect hedge, generalist infrastructure assets are often linked to inflation and enjoy inflation-protected cash flows. First Sentier Global Listed Infrastructure is an option. Up by 14% this year at the time of writing (17 August 29022), the fund has already shown its worth.

Another option is simply to invest outside of the UK. Given the relative strength of the dollar over the pound, I like Brown Advisory US Flexible Equity or Lazard Global Equity Franchise. 

Physical gold has not been a great hedge so far, but historically it has been a great preserver of capital. Now that inflation is in double digits people may wake up and remember this. In which case, an option would be Jupiter’s Gold and Silver fund.

Brian Byrnes, head of personal finance, Moneybox

The relatively good news for investors is that their best course of action is quite simple: diversification.

If an investor builds a diversified portfolio with allocations to all the major asset classes: equities; bonds; property; commodities, etc, they give themselves the best possible chance of maintaining the real value of their wealth once inflation is taken into account. 

Investors can add in more niche asset classes such as alternatives and collectables, but should keep these as a relatively small part of their overall portfolio. It’s possible that these investments may provide protection against inflation but, unfortunately, we just do not know that in advance and investors do not want to be over-exposed to any one investment or sector in particular.

Graham Bishop, chief investment officer, Handelsbanken Wealth & Asset Management

Firstly, let’s remember why inflation is so high. It’s the product of a huge range of factors, and the Covid-19 pandemic created a perfect storm for pricing pressures to build – from supply chain disruptions to the release of pent-up, post-lockdown consumer demand.

Importantly, it is a statement about what has happened over the last 12 months and does not necessarily point to what will happen over the next year. We believe many of the factors driving inflation up should fade over the medium term.

In terms of investors protecting their wealth from inflation, global multi-asset portfolios offer reasonable inflation protection if they include financial assets with embedded pricing power, such as shares and real assets, for example, commercial property, infrastructure, commodities, commodity-linked exposures.

Financial assets, which don’t tend to thrive in the short-term when inflation is rising – such as bonds – shouldn’t be ignored completely, but rather held in limited quantities and carefully risk-managed.

Ian Brady, chief investment officer, WH Ireland

Somewhat ironically whilst non-financial press headlines are still full of inflation stories, financial markets have moved on with oil, wheat and used-car inflation already rolling over, becoming more comfortable that other prices will surely follow this downward path in the foreseeable future.

What investors are now concerned about is a protracted downturn or recession in the West and the inability of China to fully reopen in the East, due to the zero Covid policy of its government.

However, there is increasing unease that whilst inflation will fall from current elevated levels it will remain structurally higher than it was in the decade pre Covid, so ‘stagflation’ is the current buzzword.

In such an environment, investors are best served by funds and shares that are less prone to ‘de-rating’ and can demonstrate robust dividend growth over time. One such fund in the UK is JO Hambro UK Equity Income. This longstanding team has compounded dividends in the high single digits and currently stands on a yield of around 5%.

Paul Hookway, senior fund analyst, Kleinwort Hambros

To protect portfolios against inflation I would recommend funds that provide a high level of cash flow visibility into the future, increasing certainty that the positive impact of rising inflation will not be offset by other factors.

For example, HICL and International Public Partnerships are both listed Social infrastructure funds, with inflation-linked contracts for the majority of the assets they operate.

Vikash Gupta, ceo, VAR Capital

To protect their wealth on the back of drastic inflation figures, investors should think global and focus on large-cap companies. They are more likely to be successful in weathering the current storm, from absorbing higher input and financing costs to a better ability to potentially pass some of the commodity price increases onto their customers. 

Investors might also consider a position in alternatives, especially select macro-focused strategies. Macro hedge funds tend to be a good diversifier in difficult times, and they have proved their value again this year after posting positive returns year to date, beating many other asset classes.

We would suggest avoiding ‘bond proxies’ such as dividend yielding stocks. They may create the illusion that their dividends will at least partially make up for high inflation, but their price performance is likely to suffer considerably with rising interest rates.

Other investments to avoid are small cap companies, long-dated bonds and emerging markets. High-yield investments may also experience significant volatility as the cost of financing increases.

Investment is speculative and your capital is at risk. You may not get back some or even all of your money. Nothing in this article should be taken to constitute advice.

By Andrew Michael
November 16, 2022


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