Battling inflation by investing in the right assets

You have probably noticed that your grocery bill has gone up recently, even though your shopping list has remained largely the same. 

Inflation in many countries, including Singapore, has soared to multi-year highs, driven by the perfect storm of a post-pandemic rebound in economic activity, rising commodity prices and supply chain disruptions.

Same price, less rice

Inflation is a sustained rise in overall price levels and can be described as “too many dollars chasing too few goods”. As spending outpaces the production of goods and services, the excess supply of dollars in an economy results in a decrease in purchasing power – in other words, less rice for the same price.

In April 2022, Singapore’s core inflation – which includes food and other goods, but excludes accommodation and private transport costs – jumped to 3.3 per cent year-on-year, the highest level since early 20121. The Government expects rising core inflation to persist in the coming months.

Implications for savings and investments

Inflation poses a “stealth” threat because it chips away at real savings and investment returns. For example, an investment that returns 2 per cent before inflation in an environment of 3 per cent inflation will actually produce a negative return (−1 per cent) when adjusted for inflation.

Very high inflation tends to have a negative impact on assets such as stocks and bonds. Investors who rely on a typical 60/40 portfolio (60 per cent equities and 40 per cent bonds) might find diversification increasingly hard to attain as high inflation often leads to higher stock-bond correlations.

Maintaining a constant allocation to inflation-hedging assets can help investors cushion their portfolios against rising inflation.

A real way to fight inflation in portfolios

Incorporating inflation protection in a portfolio starts with real assets, which generally have positive sensitivity to inflation. They tend not only to perform well when inflation is rising, but also to actually benefit from higher levels of inflation. 

Examples of inflation-sensitive assets include commodities (one of the best performing asset classes this year), inflation-linked bonds, real estate and select currencies.

Different types of real assets will perform differently depending on the macroeconomic environment. For example, commodities tend to perform best during high inflation and high growth environments, while gold and inflation-linked bonds are usually among the best performing against a backdrop of high inflation but slowing growth.

What is the best way to invest in real assets?

A multi-asset approach to real assets, in our view, offers numerous advantages. By combining a variety of inflation fighters, a portfolio may have a more modest volatility profile and may be resilient in a broader range of macroeconomic environments.

With the PIMCO GIS Inflation Multi-Asset Fund, investors do not need to choose a specific real asset and try to time the market. Rather, they can access an all-in-one portfolio of inflation fighters that is actively managed. The fund aims to preserve the real value of capital through prudent investment management and predominantly invests in a diversified portfolio of inflation-related assets.

For example, in a risk-off environment with elevated volatility, the portfolio could lean more towards shock absorbers such as inflation-linked bonds and gold. In a more risk-on environment, the portfolio could tilt towards more growth-oriented segments such as commodities and real estate investment trusts (Reits).

We believe that even a modest allocation within an investors’ overall portfolio may offer them the potential to not only protect against, but also benefit from higher inflation.

Learn more about how the PIMCO GIS Inflation Multi-Asset Fund can help your portfolio.

Footnote:

1Source: Monetary Authority of Singapore

Important Information

This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.

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