Investment Allocations in a Rising Inflation Environment: A Guide

When inflation begins to rise, Many financial advisors observe a lot of outflows from fixed income and reduced demand for equities as a result of the disaster. This has led many to wonder what is the best allocation amid a rising inflation environment.

Kickstarting Economic Activity

Despite pre-pandemic nostalgia, the reality is that global growth in 2019 was quite anaemic, and inflation rates were still undershooting targeted levels by a significant margin. Given this situation, the most appropriate policy stance for many countries is to continue with very low interest rates until there’s an improvement on either side of the equation.

The pandemic only worsened these deflationary pressures and interest rates. Rates and yields are at historic lows, so we are currently experiencing a period of low borrowing costs.

This interest rate environment is a sign of economic weakness, and will do nothing to help Ireland. The problem is that the artificially low rates are causing house prices to inflate even further, making it difficult for young people looking for housing. 

We need growth to pick up strongly

Higher interest rates are necessary to help spur the economy. Unfortunately, it does not appear that we will get what we need from central bankers.

Last week, officials from the US Federal Reserve’s interest rate-setting committee, the FOMC, noted that economic growth is picking up as the economy continues to recover. However, they believe that low rates and bond buying should continue for the foreseeable future.

Although inflation is above its desired 2% target, this increase is likely temporary and will not necessitate any change in interest rates soon. Although US economic growth was slightly lower than expected at 6.5% annualized from April to June, the Federal Reserve goal of pushing for an eventual increase in interest rates has not changed.

ECB will stick to its expansionary approach

Across Europe, the same sense of recovery is less vibrant than in the US..

German Bundesbank president Jens Weidmann has raised concerns that the ECB will keep interest rates low for too long. However, there is no chance of the ECB changing its approach in response to his feedback anytime soon.

The ultra-low interest rate environment has created inflation in the housing market that will continue to get worse if no changes are made.

While not a desirable condition, increased interest rates are necessary for a sustainable housing market. The good news is that new construction in the second quarter showed an uptick to some degree.

A sustainable real estate market needs high interest rates, and the sooner the better. Although not good for home ownership, higher interest rates are essential for managing supply as little homes have been built this year while there has been strong demand from potential buyers both domestically and internationally.

What does higher inflation mean for your investment portfolio?

Erosion of Purchasing Power:

Simply put, when inflation is high, the cost for your future purchases will exceed what you would have paid today.

Equities can struggle: 

In recent years, growth stocks have driven equity market gains. Stocks are valued on their future earnings and this is why tech companies can be valued at multiples of billions of dollars with little to no revenue: it’s all about future earnings! 

However, in times when inflation rises we typically see an increase in interest rates which will erode the present value of a company’s cash flows if they rely heavily on debt financing for acquisitions or new projects.

So how do I protect my portfolio against inflation?

Real estate’s popularity as an investment during times of inflation is due to the fact that it can act like a hedge against rising prices and also provide some income.

However, the real estate market too has been thrown on its head. With the pandemic, the real estate market has been thrown off its axis and people are questioning whether or not offices will sustain themselves economically, residential properties have become overvalued, while non-essential sectors of commercial property markets face lockdowns from time to time with a move away from high street shopping which was once popular largely because it brought all goods under one roof for consumers who could only afford so much.

Essential retail real estate has been the one bright spot in an otherwise bleak 18 months. With products that people need for everyday life, these stores will always be important and are not hindered by uncertain times ahead of us. In fact, any future lockdowns would actually increase turnover because customers looking to buy necessities like food items or gas could find themselves short on time with their bank accounts frozen as a result – meaning they’ll have no choice but to turn around immediately after getting what they came for!

The Greenman OPEN (GMO) fund is an excellent investment opportunity for those interested in the German market. The GMO Fund offers investors access to a regulated and fully transparent structure, while also giving them exposure to one of Germany’s most robust industries – food retail. With this asset class being inherently resilient as we have seen over recent decades, it seems like an easy decision!

What benefits does the GMO fund offer investors?

Because our clients are essential retailers, their revenue is determined by inflation. So if inflation increases, so will GMOs rental income. This means that investors can expect continued level returns over time.

GMOs existing financing is locked at fixed rates for the next 5-6 years thanks to multi-year terms. If the ECB decides to increase interest rates, GMO’s financing remains protected.

Investors benefit from putting their money to work by allocating it to GMO, thereby avoiding the loss of purchasing power caused by inflation while also eliminating bank charges.

One of the many uncertainties as we move toward a post-pandemic world include fluctuations in interest rates and inflation.

Central bankers’ emphasis on economic stimulus emerged as the world economy was hit by pandemic in 2020, with efforts leaning toward quantitative easing and interest rates. Governments ramped up fiscal stimulus, relying heavily on tax cuts and increased spending to varying degrees of effectiveness.

Seeking Advice

Gallivan Financial handles finances for hundred of clients in Ireland. We want to make sure that you get the most out of your money by working with a team of trusted professionals for your financial services needs.

If you need help managing your money, get in touch with us! We will give you an honest opinion on how to plan for the future.

Call today at +353 646 637 393, email info@gallivanfinancial.ie, or send us a message in the chat box via social media, and let us know how we can help.

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