Experts Share Where Investors Should Focus Their Money in a High Inflation Environment
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Inflation continued to rise in May, with data worse than expected. The Consumer Price Index (CPI) on June 10 increased 8.6% for the 12 months ending May, the largest 12-month increase since the period ending December 1981.

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This comes amid a market that has entered bear territory and investors becoming more jittery by the day. Now, several experts are sharing their thoughts as to where to invest in this high inflationary and extremely volatile environment.

Gold and Bitcoin

Charlie Morris, CIO of ByteTree Asset Management and Founder of ByteTree.com, a data platform for digital assets, told GOBankingRates that gold has historically delivered portfolio protection in inflationary environments, while Bitcoin is the gold of the internet and is expected to mimic that over time.

“It’s important to note that inflation protection only works if the asset in question is cheap or fair value. Overpriced assets will never succeed in delivering inflation protection,” he said. “In 2022, equities and bonds have experienced a bubble at the same time, and so neither asset class has proved to be an effective inflation hedge. Bitcoin has also been overpriced, but gold has traded close to fair value.  Bitcoin is no longer overpriced,” he added.

He also noted that gold is stable while Bitcoin is volatile.

“Because they naturally respond differently to risk-on, risk-off market conditions, it is hard to imagine them having a bubble at the same time,” he said, adding that they are not in competition, play different roles, have global cross-border and cultural appeal, and come together as an all-weather liquid inflation hedge.

Precious Metals

Derek Izuel, CIO, Shelton Capital Management, told GOBankingRates that precious metal prices are driven by long-term expectations of real rates of return. “With the rise in interest rates and the change in sentiment of the Fed since late 2021, expectations for real rates have risen, going positive for the first time since before the pandemic,” Izuel said. “Gold rises when these expectations are negative, so despite the rise in inflation, the rapid reaction of the Fed is likely to put pressure on precious metals.”

Gold’s back, wrote Edward Moya, Senior Market Analyst, The Americas OANDA in a note sent to GOBankingRates. “Gold has resumed its role as safe-haven as financial markets worry about aggressive central bank tightening globally and US economic data decelerates. Recession fears are growing and that is triggering an exodus of equities and influx of safe-haven purchases of bullion,” he added.

Real Estate

Izuel said that with a slowing economy, rapidly rising mortgage rates and an overvalued housing market, real estate stands to be weak going forward.

He added, however, that “there may be opportunities in counter-cyclical areas of real estate such as multi-family and health-care focused commercial.”

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In addition to these, according to Annuity.org, commercial real estate (CRE) has been another effective hedge against inflation historically, as the rise in property values and rents enables owners of CRE to maintain the real value of their properties while generating higher incomes over time.

High-Yield, Floating-Rate Bank Loans

High-yield bank loans (HYBLs), also known as leveraged loans, are another effective way to protect finances from inflation, Annuity.org noted, adding that the protective nature of these loans stems from the fact that their interest rates periodically reset to keep pace with the prevailing market rates, which are strongly correlated with inflation. However, during times of economic distress, these can demonstrate equity-like volatility.

“As a result, they experience periods of illiquidity, when the assets are not able to be quickly or easily converted into cash without a loss in value. To minimize your exposure to this risk, be sure to invest in HYBLs via a fund-style vehicle with many individual positions,” according to Annuity.org.

Equities

According to Izuel, the best opportunities will be in international markets, as the sector composition and relative valuation favor these stocks during a slowdown in economic activity. 

“Emerging markets will be strong when the economy recovers, and removal of COVID restrictions in China may be an early catalyst,” he said, adding, “favor smaller stocks in the U.S. — they will lead the recovery, and the ride of the FANG stocks is over.”

Commodities and High-Quality Dividend Paying Equities

Austin Graff, Portfolio Manager at TrueMark Investments, who runs DIVZ, a dividend based ETF that works as a hedge against inflation, told GOBankingRates that the best hedges for inflation in the current environment are commodities and high-quality dividend paying equities. 

Graff explained that commodity prices have spiraled higher as demand outstrips limited global supplies, and Fed Chair Powell has even indicated that he doesn’t have the ability to control commodity prices — therefore, prices will likely stay higher for longer than many expect. 

In terms of high-quality dividend payers, “they are a good option as they often have pricing power, allowing earnings, free cash flows and dividends to increase with inflationary price increases,” he added.

“In DIVZ we are currently focused on investments in high-quality dividend payers that also have revenues that are directly linked to higher commodity prices,” he added. “Many of these companies have committed to returning excess cash flow generated by high commodity prices to investors in the form of higher dividends and share buybacks — protecting investors from the impacts of inflation.”

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According to Graff, names that fall into the category of benefiting from higher commodity prices would be Devon Energy (DVN), Exxon Mobil (XOM) and Coterra Energy (CTRA).

“We also have a lot of exposure to names in healthcare and consumer staples that have pricing power like Johnson & Johnson (JNJ), UnitedHeatlh Group (UNH), Abbvie (ABBV), Philip Morris (PM) and Altria Group (MO),” he added.

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About the Author

Yaël Bizouati-Kennedy is a full-time financial journalist and has written for several publications, including Dow Jones, The Financial Times Group, Bloomberg and Business Insider. She also worked as a vice president/senior content writer for major NYC-based financial companies, including New York Life and MSCI. Yaël is now freelancing and most recently, she co-authored  the book “Blockchain for Medical Research: Accelerating Trust in Healthcare,” with Dr. Sean Manion. (CRC Press, April 2020) She holds two master’s degrees, including one in Journalism from New York University and one in Russian Studies from Université Toulouse-Jean Jaurès, France.

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