Investors need to protect their investments and long-term wealth against soaring inflation and rising interest rates by revising which assets make up their portfolios.
This is the stark warning from Nigel Green, the chief executive and founder of deVere Group, a game-changing global financial advisory organisation.
It comes as retail and institutional investors the world over are battling the economic fallout of soaring consumer prices.
He notes: “Long term and short duration assets respond differently to rising inflation and interest rates.
“Short duration assets include value stocks, such as agriculture, financials, mining and energy sectors. These are the stocks that offer ‘jam today’ for investors, which are popular during periods of volatility as we’re experiencing now.
“Long duration assets, such as long-dated bonds and tech stocks, are particularly vulnerable to rising inflation and interest rate hikes from major western central banks.
“As such, in this volatile environment, investors might need to adjust their portfolios accordingly in order to mitigate risks to their investments and, therefore, their long-term wealth.”
Central banks face a dilemma, says the deVere CEO. Their current aim is to make money more expensive in order to weaken demand and bring down wage growth – “but without causing mass unemployment and triggering a recession.”
When it comes to inflation protection, he says that investors seeking both capital appreciation and capital preservation in this current landscape, should also consider diversifying into less traditional asset classes.
“Rising interest rates, amid weakening business and household demand, is bad news for both bond and stock markets.
“Meanwhile inflation will eat into company profit margins for many companies, particularly those selling discretionary products that businesses and consumers can delay purchasing.
“All this creates market volatility. Investors should consider less familiar, return-enhancing asset classes which could include venture capital, structured products, high dividend stocks, hedge funds and managed futures, and real estate, amongst others. They are also likely to increase diversification and reduce volatility, due to their low correlations to the more traditional investments; and they can hedge some portfolio exposures.
Nigel Green goes on to add: “It is impossible to know how much of the inflation and interest rate story is already baked-in to stock and bond market prices, but investors are anticipating further market volatility.”
The VIX ‘fear gauge’ index of implied future volatility on the S&P500 ended last week at a historically high level of 31.
But investors do appear to have confidence in the U.S. Federal Reserve’s – the world’s most powerful central bank – ability to bring down inflation in the medium term, with the 5yr/5yr forward inflation expectation rate -which measures the average annual inflation rate that is expected over a five year period, commencing in five years- falling over the last fortnight to 2.36% (only a little above the Fed’s 2% target rate).
Portfolio diversification is key, asserts the deVere Group chief executive.
“It’s true that equities have tended to outperform bonds and other assets over the long term. But a broadly diversified portfolio of equities, bonds, commodities and alternatives has performed better on a risk-adjusted basis, meaning after taking into account volatility.”
He concludes: “As ever, bouts of market volatility are the times when most opportunities are presented for investors looking to build long-term wealth.
“That said, investors should consider if they need to revise their portfolios in the current environment.”