In order to minimise the damage inflicted by inflation to their returns, investors should consider conducting inflation trade – the shifting of a portfolio’s assets towards those more favourable to an inflationary environment
Chaddy Kirbaj, vice director at Swissquote Bank Dubai rep. office.
Inflation trade is an investment strategy or trading method that seeks to profit from rising prices, known as “inflation”, or from anticipated inflation. Under this concept, inflation trade relies on an increase in consumer prices which is unlikely to be permanent, making it a kind of trending strategy rather than a permanent one.
Global economic figures show that inflation has increased significantly in advanced economies and keeps rising steadily in emerging markets due to a myriad of factors. These include, but are not limited to, loosening global monetary policies, increased supply of money in the financial system, low interest rates, and record highs in historical prices of commodities and food due to supply chain disruptions since the beginning of the pandemic. Bad weather, such as drought and heatwaves occurring in the United States and other countries, has been a major catalyst as well.
The inflation rate in the United States stands at 5 percent now, the highest in over a decade. In China, the world’s second biggest economy and biggest commodities consumer, inflation increased by 1.3 percent in June, the highest in eight months. This tells us that rising inflation is a global phenomenon, as well as a dilemma.
[node:story_0]
Inflation is particularly problematic for investors, whose portfolio value may be shaken up due to rising prices.
To stay up-to-date with the state of inflation, investors should look to the consumer price index (CPI), which accounts for the prices of various goods and services including food, education, and healthcare, among others.
However, the two elements of the index that matter the most for measuring inflation are housing prices and transportation costs, which form the largest percentage of the CPI.
In order to minimise the damage inflicted by inflation to their returns, investors should consider conducting inflation trade – the shifting of a portfolio’s assets towards those more favourable to an inflationary environment.
For example, TIPS (treasury inflation protected securities) are one of the most popular products for hedging and protecting cash investments from the negative effects of inflation. Rising inflation decreases the value of cash purchasing power, mainly in the emerging markets and less advanced economies.
Cyclical stocks, such as technology, are another useful category when prices are rising from inflation. Commodities, in particular precious metals, are also typically considered a good hedge against inflation, because the prices of commodities rise as the value of the US dollar drops. Therefore, investors may use both commodity trading tactics and currency derivatives for the purposes of hedging and arbitrage.
While there is currently a huge buzz surrounding the cryptocurrency market, with some massive gains enjoyed in certain areas, cryptocurrency should not be considered a reliable inflation hedge as it is an intangible asset which demonstrates aggressive volatility, high risk, and a lack of government regulation.
In contrast, real estate funds have always been one of the major hedging tools that investors rely on due to their sustainability and reduced risk-volatility. However, inflation must be tracked regularly against the yields of real estate investment trusts (REITs), as the yields may decrease. US inflation currently stands at 5 percent YoY, which is difficult to beat with real estate funds, so investors should be highly selective.
Fixed income assets – which include government and corporate bonds – are also an attractive option for hedging against inflation. Fixed income investment is a highly conservative strategy, as returns are generated from low-risk securities, which are the underlying asset.
In times of growth and market euphoria, the governments of advanced economies pay higher yields (such as on US treasury bonds), and these returns are likely to drop when market sentiments turn bearish. Therefore, fixed income assets are not only useful as an inflation hedge but are also appropriate for long-term investors who are not concerned with macro factors and day-to-day fluctuations.
Finally, you can consider investing in an inflation trade tool. This kind of investment product assesses the impact of asset prices by the selection of tangible assets such as real estate and commodities, and investment assets such as stocks and bonds. It gives investors a nicely diversified allocation that benefits from market volatility for those looking for good performance across the various stages of inflation acceleration.
Long-term investors who want to avoid inflation trading can target defensive sectors such as utilities and consumer products. While these stocks may offer smaller gains, they are sustainable, and the accumulative returns will help overcome any potential collateral damage from high inflation.
Chaddy Kirbaj, vice director at Swissquote Bank Dubai rep. office.
Follow us on
For all the latest business news from the UAE and Gulf countries, follow us on Twitter and LinkedIn, like us on Facebook and subscribe to our YouTube page, which is updated daily.
By ITP
More of this topic
Investing in times of rising inflation
In order to minimise the damage inflicted by inflation to their returns, investors should consider conducting inflation trade – the shifting of a portfolio’s assets towards those more favourable to an inflationary environment
Chaddy Kirbaj, vice director at Swissquote Bank Dubai rep. office.
Inflation trade is an investment strategy or trading method that seeks to profit from rising prices, known as “inflation”, or from anticipated inflation. Under this concept, inflation trade relies on an increase in consumer prices which is unlikely to be permanent, making it a kind of trending strategy rather than a permanent one.
Global economic figures show that inflation has increased significantly in advanced economies and keeps rising steadily in emerging markets due to a myriad of factors. These include, but are not limited to, loosening global monetary policies, increased supply of money in the financial system, low interest rates, and record highs in historical prices of commodities and food due to supply chain disruptions since the beginning of the pandemic. Bad weather, such as drought and heatwaves occurring in the United States and other countries, has been a major catalyst as well.
The inflation rate in the United States stands at 5 percent now, the highest in over a decade. In China, the world’s second biggest economy and biggest commodities consumer, inflation increased by 1.3 percent in June, the highest in eight months. This tells us that rising inflation is a global phenomenon, as well as a dilemma.
[node:story_0]
Inflation is particularly problematic for investors, whose portfolio value may be shaken up due to rising prices.
To stay up-to-date with the state of inflation, investors should look to the consumer price index (CPI), which accounts for the prices of various goods and services including food, education, and healthcare, among others.
However, the two elements of the index that matter the most for measuring inflation are housing prices and transportation costs, which form the largest percentage of the CPI.
In order to minimise the damage inflicted by inflation to their returns, investors should consider conducting inflation trade – the shifting of a portfolio’s assets towards those more favourable to an inflationary environment.
For example, TIPS (treasury inflation protected securities) are one of the most popular products for hedging and protecting cash investments from the negative effects of inflation. Rising inflation decreases the value of cash purchasing power, mainly in the emerging markets and less advanced economies.
Cyclical stocks, such as technology, are another useful category when prices are rising from inflation. Commodities, in particular precious metals, are also typically considered a good hedge against inflation, because the prices of commodities rise as the value of the US dollar drops. Therefore, investors may use both commodity trading tactics and currency derivatives for the purposes of hedging and arbitrage.
While there is currently a huge buzz surrounding the cryptocurrency market, with some massive gains enjoyed in certain areas, cryptocurrency should not be considered a reliable inflation hedge as it is an intangible asset which demonstrates aggressive volatility, high risk, and a lack of government regulation.
In contrast, real estate funds have always been one of the major hedging tools that investors rely on due to their sustainability and reduced risk-volatility. However, inflation must be tracked regularly against the yields of real estate investment trusts (REITs), as the yields may decrease. US inflation currently stands at 5 percent YoY, which is difficult to beat with real estate funds, so investors should be highly selective.
Fixed income assets – which include government and corporate bonds – are also an attractive option for hedging against inflation. Fixed income investment is a highly conservative strategy, as returns are generated from low-risk securities, which are the underlying asset.
In times of growth and market euphoria, the governments of advanced economies pay higher yields (such as on US treasury bonds), and these returns are likely to drop when market sentiments turn bearish. Therefore, fixed income assets are not only useful as an inflation hedge but are also appropriate for long-term investors who are not concerned with macro factors and day-to-day fluctuations.
Finally, you can consider investing in an inflation trade tool. This kind of investment product assesses the impact of asset prices by the selection of tangible assets such as real estate and commodities, and investment assets such as stocks and bonds. It gives investors a nicely diversified allocation that benefits from market volatility for those looking for good performance across the various stages of inflation acceleration.
Long-term investors who want to avoid inflation trading can target defensive sectors such as utilities and consumer products. While these stocks may offer smaller gains, they are sustainable, and the accumulative returns will help overcome any potential collateral damage from high inflation.
Chaddy Kirbaj, vice director at Swissquote Bank Dubai rep. office.
Follow us on
Latest News