UK inflation rates are currently set to reach a 30-year high of 6% in April (Reuters), following a convergence of economic factors brought about by the pandemic. This has left many investors feeling cautious about investing.
However, the New Year provides the perfect occasion to carry out some maintenance on your portfolio. You can diversify and alter your investment portfolio in line with these economic factors to minimise risk to returns and hedge against the impact of the high-inflation market of 2022.
Why should I refresh my portfolio in the New Year?
With inflation on the rise in the UK, it is important to check that your investments are hedged from this change in the economy to reduce the investment risk.
Regular maintenance of your portfolio and being responsive to market changes, such as rising inflation, is key to ensuring that your investment portfolio successfully continues to bring a return. Whereas “putting things off” or leaving your portfolio unchanged can lead to imbalance and problems with your investments.
What investments perform well in a high-inflation market?
Investments such as tangible assets, commodities and inflation-linked bonds are more likely to perform when the economy is hit with rising inflation – but why?
- Tangible assets
Investing in tangible assets with a predetermined financial value, especially property, can benefit from rising inflation.
With property investment, inflation increases equity, therefore acting as a discount to debt, as well as positively impacting the value of the property. Also, as a property owner, you will benefit from higher rental income.
Investing in commodities such as precious metals, oils or agricultural products can provide a hedge against rising inflation and help with portfolio diversification.
Commodity prices tend to rise in line with inflation, meaning that their value is usually greater in a high-inflation market.
- Inflation-linked bonds
Inflation-linked bonds were designed to help hedge against rising inflation, as the principal value increases with inflation and decreases with deflation.
Therefore, they are a great way to protect your return on investment during periods of high inflation.
What investments to be wary of in a high-inflation market?
When investing in a high-inflation market, interest rates are usually increased, and can negatively impact bonds and growth stocks. Therefore, these types of investments are best to avoid when preparing your portfolio for high inflation.
Bonds are normally low-risk investments however, they are subject to interest-rate risk. As interest rates respond to inflation, they will rise in the high-inflation market, which will result in falling bond prices and erode the value of the bond.
- Growth stocks
When investing in a growth stock you expect returns over a long period, but with limited cash flow right now. However, inflation negatively impacts this type of investment.
Find out more about the return of inflation and the impact on investments.
KLO Financial Services
At KLO Financial Services, our independent financial advisers offer support with professional and personal financial management, including investment diversification and portfolio maintenance in line with current market trends.