Open a newspaper today, and the word "inflation" is all over the headlines. Inflation has a direct impact on your portfolio, with certain assets tending to lose value during inflationary periods. With the right inflation trade know-how, you can adapt your investing strategy to stay ahead.
This article at a glance:
- Inflation trade describes the moves that institutional and retail investors can make in response to high inflation, to protect the value of their portfolios.
- The assets that do well are often determined by what’s causing the inflation – it’s not a fixed list.
- Inflation trades may require you to shift funds away from certain assets towards other ones, or introduce new assets to your portfolio.
What does "inflation trade" mean?
Inflation trade is a term that describes the moves that institutional and retail investors can make in response to high inflation, to protect the value of their portfolios. During periods of high inflation, stock markets tend to suffer overall (although some stocks may perform well).
With inflation trading, the goal is to move money into "hedge" assets that typically perform well during periods of high inflation, such as real estate or certain commodities. This way, you can protect your wealth from the erosive effects of inflation.
How to trade during inflation
A hallmark of inflation is unpredictability. The assets that do well are often determined by what’s causing the inflation – it’s not a fixed list. However, investors can look to past periods of inflation for some guidance.
Moreover, an inflation trading strategy requires you to bring some agility within your portfolio. This could mean shifting funds away from certain assets towards other ones, or introducing new assets to your portfolio altogether.
However, this does not mean putting all of your money into, say, oil or real estate. Keep your long-term goals in mind when placing an inflation trade, and avoid overextending your allocations.
Assets that do best during inflation
Some assets that typically fare well during high inflation include:
Assets that fare worse during inflation
Meanwhile, assets that tend to do poorly during high inflation include:
- Fixed-rate debt
- Traditional bonds
- Highly-leveraged companies
- Small-cap stocks
What if there's a recession?
One of the major risks from inflation is that it will trigger a wider economic recession. One major cause of this is the increase in borrowing rates that comes with inflation, which makes it harder to secure credit and service existing debt obligations.
This can quickly choke off economic growth and opportunities to the point where the wider economy begins to shrink.
Trading in a recession
It is usually best to avoid speculative or cyclical assets during a recession. Their growth is fueled by positive market sentiment, which is highly likely to be lacking during a recession.
Meanwhile, investing in companies with high levels of debt is also a bad idea, since they are more likely to default or go bankrupt during a recession.
Look for stocks of companies with strong balance sheets that operate in more recession-resistant industries, such as utilities, consumer staples, or energy.
Moreover, remember to stay in tune with the times. Follow market news to know what assets are being impacted due to unprecedented external events. This additional information beyond the textbook guidelines of trading during inflationary or recessionary periods can aid you in making the right portfolio choices.
This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorized to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.