The price of panic: why investors should be wary of the inflation crystal ball

By London & Capital | 18 Oct, 2022

Start a conversation these days and the likelihood is that at some point it will turn to inflation. Shall we go for a drink? How’s that house move shaping up? Where shall we go on holiday next year? Avoiding reference to rising prices or the efforts to control them is very difficult. The Bank of England’s target rate of inflation is 2% but the actual rate is hovering around 10%. It’s a conversation worth having.

We are dealing with forecasts after all

The fact that prices have risen is not in dispute, but what happens next is not so clear. We are dealing with forecasts after all. Gloomy predictions have been rife with a treacherous path towards around 18% voiced by some experts. A threatening combination of higher energy prices, supply chain disruption, low interest rates and a decade or so of relaxed attitudes to printing money have been pointed to as the primary causes.

This worrying cocktail of economic trends was recently met with a robust response from the UK authorities, including a bold energy rescue scheme expected to cost GBP 60bn in its first six months. Thanks in part to this intervention, the Bank of England now expects inflation to peak at 11% before steadily dropping.

But what should investors make of all this?

Anyone that scrambled for changes in their portfolio based on the highest inflation predictions may now have to reassess their position. And if forecasts can change that fast once, it’s safe to say they can change again. The future is not mapped out.

London & Capital advisers are well placed to ensure that your portfolio is well-guarded against a variety of economic headwinds, including inflation. Risk appetites vary and different asset classes all have their own pluses and minuses, but some foundational investment principles will always be important.

Patience is better than panic

Devising a long-term strategy and sticking to it is more likely to benefit you than making rash decisions during hard times. For example, equity indexes such as the FTSE 100 and S&P 500 have shown consistent gains over many years despite multiple shocks. Spreading your risk is also always wise, perhaps with a good mix of cash, equities, bonds, property and commodities to ensure you don’t have all your eggs in one basket.

The vulnerability of cash to inflation is well-known

If inflation rates are high, this can erode the value of cash sitting in an account. There is nothing wrong with enjoying the flexibility of cash, but making sure it pays a good level of interest can weather any loss in value. There are also advantages to saving in multiple currencies in order to make your money work harder for you. If you can find a better interest rate on dollars then maybe they are a better option than sterling.

Bonds have always been a favourite of investors. They are known as a ‘fixed income’ asset because they provide a fixed return. This predictability gives investors a level of security that they don’t get elsewhere. The quality of bonds varies widely but provided they mature without issue the holder always knows what return they will receive. But the fixed level of return means that they are also vulnerable to inflationary pressures. Yields on bonds rise when the price drops and rising yields on some of the world’s most popular government bonds have indicated that there is a certain level of discomfort amongst bondholders with current economic conditions. A good investment adviser can talk you through how suitable bonds are for your goals.

Stocks and shares typically give the investor two ways to make profit. They can rise in value or issue dividends to holders. They don’t provide the fixed return that you get with bonds, but taking a share of profit means your fortunes rise and fall with that of the company or index. These assets can be a very effective guard against inflation as some companies will naturally do better in a high inflationary environment. Energy companies may be able to sell their product at higher prices or a budget supermarket chain may attract more customers during a downturn. Ensuring part of your equity portfolio is positioned to benefit from inflation is a good way of defending against rising prices.

High inflation is a less than ideal situation for investors, but a well-managed investment portfolio can provide stability no matter what the future holds.

At London & Capital, we strive to provide peace of mind to our clients in all economic conditions and ensure your wealth is protected.

To get in contact with London & Capital, please give us a call on +44 (0) 207 396 3388 or click here.

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