The supply-chain disruption and high fuel prices suggests that inflation may persist for longer. A stronger than expected US inflation may cause an increase in cost of living, weaker consumer spending and thus lower corporate profitability, which could potentially lead to an economic slowdown.
In addition to the tensions in Ukraine, upcoming economic data and the Federal Reserve’s reaction will be the key drivers to market movement and volatility in near term.
Looking ahead, investors might ask, which asset classes will provide an effective hedge against inflation? We consider a diversified portfolio with exposure in inflation hedged asset classes such as Real Estate Investment Trusts (REITs), commodities, gold, or Treasury Inflation Protected Securities (TIPS) to be one of the most optimal hedging strategies.
For fixed income assets, we maintain caution as the current high inflation situation could force central banks to increase interest rates sharply, which negatively impacts bond prices due to its inverse relationships with interest rates.
Equity performance will be driven by a combination of inflation, corporate earnings and the macro environment. Equities are expected to perform well if inflation is at a moderate level and corporates are able to maintain their profit margin by passing down the rising material prices. However, equity will underperform in a stagflation environment, where economic growth is low/negative accompanied by hyperinflation. In this scenario, profit margins will be squeezed by rising raw material prices while revenue is impacted by weaker consumer sentiments.
Concluding our first Market Insights column, we would like to extend our welcome and thanks to all our new, valued investors for starting your investment journey with us. In our monthly updates, we hope to continue sharing our thoughts on market outlook, investment strategy and portfolio performance.
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