Investors are pouring into inflation-related assets, betting that consumer prices will continue to soar, even as the central bank prepares to tighten monetary policy after nearly two years of pandemic stimulus measures.
Inflation-protected government bonds, commodity funds, and real estate investment trusts are one of the products that absorb cash to find ways to maintain spending power.
Supply chain bottlenecks, rising energy costs, heavy government spending, and strong consumer demand have pushed up global inflation in 2021.
November U.S. Consumer Price Index Rose Year-on-year growth of 6.8%-the fastest growth rate since 1982-and Eurozone inflation Climbed Reached a record 4.9%.More than three-quarters of the countries are analyzed Pew Research Center The inflation rate in the third quarter of 2021 was higher than the same period in 2019.
Central banks including the United States U.S. Federal Reserve The Bank of England has expressed its willingness to tighten monetary policy faster than originally expected, but it may still take several months to raise interest rates.
“We expect inflation to remain high next year, well above the Fed’s target, especially because supply and demand imbalances will take time to resolve,” said Roger Aliaga-Diaz, senior economist at Vanguard, a US$7.2 trillion asset management company.
Therefore, investors are trying to prepare their investment portfolios for continued price pressures, buying assets that may profit from rising inflation or hedge against inflation.
According to data from the data provider EPFR, this year a record $66.8 billion has flowed into funds holding inflation-protected Treasury bonds, that is, U.S. government bonds linked to inflation. BlackRock, the world’s largest asset management company, said that it expects inflation to continue to be higher than the level before the coronavirus pandemic and increases its position in Tips.
In the UK, the demand for inflation protection is so strong that last month’s 1.1 billion pounds of inflation-adjusted Phnom Penh bonds maturing in 2073 set the lowest yield and highest price on record at auction.
Franklin Templeton (Franklin Templeton) Chief Investment Officer Sonal Desai warned that, given the Fed’s continued market intervention, inflation-linked bonds are at risk of “some rather strange trends”. Instead, she prefers certain energy-based commodities or currencies as an indirect hedge against inflation.
“Physical assets” such as commodities or real estate have once again attracted the attention of investors. From January to November of this year, a US$4.5 billion Invesco Commodity Exchange Traded Fund held commodity futures including copper, crude oil and soybeans, inflows of US$2.4 billion. As of October, capital inflows have more than doubled from the same period in 2020. However, so far this month, investors have withdrawn $400 million from the fund.
Gold-which has always been touted as a safe haven in times of inflation-has not dazzled investors in 2021. According to data from ETF.com, leading gold ETFs have outflowed more than US$10 billion.Cryptocurrency has attracted Some investors Seek protection, but the price of Bitcoin has fallen sharply since early November.
Energy and inflation are closely related because energy costs play an important role in inflation calculations. Rising oil or natural gas prices directly push up consumer costs—the price of a can of gasoline or more expensive heating bills—and indirectly push up consumer costs by increasing the cost of manufacturing and transporting goods.
According to EPFR data, bets on rising energy costs have driven the inflow of energy-related equity funds to a record high this year.
Mike Sewell, fixed-income portfolio manager at T Rowe Price, said: “If long-term inflation is expected, commodities such as oil are often good hedging tools.”
Real estate investment trusts have always been popular in the United States because they mainly generate income through rent, and rent tends to rise with inflation. The U.S. Reit ETF with $6.8 billion inflows to Schwab is the country’s largest U.S. real estate investment trust. When rents were frozen in the first few months of the pandemic, the inflows fell to historical lows but have now recovered.
Some smaller investors seek inflation protection by purchasing the so-called I US series Savings bond The U.S. Treasury Department offers an interest rate of 7.12%, partly determined by inflation. Individuals can only purchase US$10,000 of Series I bonds each year, but the Ministry of Finance announced the issuance of US$1.3 billion in new bonds in November, the largest monthly figure on record.
John Crocker, head of active fixed-income product management at an asset management company, said that Vanguard’s Tips products and commodity funds have received strong capital inflows. But he warned, “Once inflation enters the market, don’t overreact to it.”
Crocker said standard inflation hedges are already too expensive. “Inflation protection is no longer as attractive as it used to be. This opportunity has been offset, and we will look to put our chips in different places.”