23 Jul Investment Allocations in a Rising Inflation Environment
Market analysts have been increasingly discussing the effects of rising inflationary pressures globally. As the worldwide vaccination campaign gathers pace, the reopening of economies and the quick rebound in activity that has followed has fuelled inflation in some regions. In May 2021, US inflation as measured by the consumer price index (“CPI”) increased by 5.0% year-on-year, hitting a remarkable 29-year high. While in Europe, stubbornly low inflation has risen to 1.9%, just below the target 2.0% mark.
But what does higher inflation mean for your investment portfolio?
Erosion of Purchasing Power: Inflation – the rise in the price of goods and services – reduces the purchasing power each unit of currency can buy. Simply put, when inflation is rising, the price you pay for a basket of goods tomorrow will be more than what you would have paid for the same basket of goods today.
Equities can struggle: In recent years growth stocks (which is to say, primarily technology firms) 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 but yet have little or no revenue – it is all about future earnings. However, in times of rising inflation we typically see an increase in interest rates, and this can erode the present value of a growth stock’s future cash flows and therefore the current value of the company.
So how do I protect my portfolio against inflation?
In their recent July markets update, Morgan Stanley Investment Managers stated the following in relation to the rising and persisting inflationary pressures “[…] As we expect more volatility in the coming months, not only for equity markets but also for fixed income markets, we believe that an allocation to alternatives could help increase portfolio resilience”.
Real estate, traditionally, is a popular alternative asset allocation choice in periods of rising inflation not only because rising prices increase the value of the property over time, but because real estate can also be a source of yield. However, following the societal turmoil of the pandemic the real estate market has been thrown on its head. The future viability of offices has been brought into question, residential or buy-to-let properties appear to be overvalued, while non-essential sectors of the commercial real estate market are grappling with periodic lockdowns and the move away from the high street.
Essential retail real estate has been the one bright spot in the last 18 months and the sector outlook is not hindered by an uncertain future. The products sold by essential retailers are, by their nature, necessity items and customers buy these in both good times and bad. Additionally, any future lockdowns will, as we saw in the last 18 months, actually result in elevated levels of turnover.
The Greenman OPEN (OPEN) fund offers investors access to a fully-regulated fund structure that focuses on German food-retail properties. The fund has a track record of performance and delivering investors consistent returns. OPEN offers investors diversification to a traditional safe haven country (Germany) and exposure to an inherently resilient asset class (food retail).
How does the OPEN fund offer investors protection against rising inflation?
- Rental income from our essential retailer clients is linked to inflation. If inflation begins to rise then OPEN’s rental income will also increase, insulating investor returns.
- Financing is at fixed rates for multi-year terms. If the ECB decides to increase interest rates to combat rising inflation, OPEN’s existing financing is protected from this as it is locked at fixed rates for the next 5-6 years.
- Investors put their money to work. By allocating funds to OPEN, rather than having them in cash, investors avoid the erosion of purchasing power caused by inflation, while negative interest rate charges from banks will also be averted.
By Sam Cronin