Inflation Is Here, Now What Do We Do About It?

The volatile nature of the financial markets is well-documented. Year after year, catalyst after catalyst, the financial markets continue to swing between unsustainable optimism and unjustifiable pessimism.

The last several months have been challenging months for investors as fears of inflation, concerns over monetary policy, and a potential global conflict have firmly gripped the markets in a hurricane of fear and volatility. Let’s briefly look at how the market has reacted to these fears and what investors might do to protect their portfolios. 

The last few Consumer Price Index (CPI) reports have clearly demonstrated a steep month after month increase in the rate of inflation. With inflation estimated at approximately 7.5% and rising, global equity markets have begun to fall in the wake of the inevitable interest rate increases that will soon follow.

These fears have led to significant compression in the prices of equities in the financial markets with businesses dependent on borrowing to fund their continued growth being impacted the hardest.

Beyond simple inflationary concerns, many of you will already be aware that the Russian invasion of Ukraine has had a significant effect on financial markets across the globe. The conflict has sent oil prices soaring over 91$ a barrel as gold follows suit with a 5.6% increase in value over the last month.

Further, as Russia continues to be isolated from the world economy, economic sanctions have caused the Russian Ruble to plummet in value. Since February 9th, the Ruble has fallen over 31.5% against the U.S Dollar. A decline of this magnitude in the Ruble is unprecedented and as the conflict rages on, there is no way to estimate how much value the Ruble will lose.

With yet another CPI report being released on the 10th March and peace talks with Russia still inconclusive, many investors will rightly be curious as to how they might protect themselves from this kind of volatility. 

Protecting your portfolios in this kind of market can be especially difficult. Many Russian investors would have found that even liquidating assets and moving entirely to cash did not protect their wealth as they might have hoped it had. However, there are some strategies that investors can use to protect their wealth in these troubled markets.

Typically, Real-Estate Investment Trusts (REITs) are fantastic investment vehicles to protect against the effects of inflation. This is because inflation also causes the value of houses and rents to rise along with other goods and services. Rising valuations and rents are beneficial to REITs who are then, in turn, able to continue to produce dividends for their investors.

Similarly, gold has historically been used as a hedge against rising inflation. With gold currently rising in value, it is entirely possible that many investors will choose to rotate some of their portfolios into gold assets to ensure that their wealth is protected.

Lastly, Bitcoin offers a prospective solution for those investors looking to adopt a high-risk approach to hedging against market volatility. Although its price action over the last few months does not support the argument for Bitcoin acting as an inflation hedge, Bitcoin has inarguably proven to be a lucrative investment since being created in 2009.

As a result, it is fair to argue that over the coming years, Bitcoin will continue to outperform inflation and the wider market. Therefore, many investors may wish to adopt Bitcoin into their portfolios to not only hedge against inflationary risks but to assist in growing their wealth.

Ultimately, every investor will need to determine which investment strategy is right for them. Whether you choose to rotate into a more defensive portfolio or weather the storm currently rampaging through growth stocks is a personal decision each investor must make for themselves.