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WisdomTree: Professional investors losing out on inflation hedging benefits of commodities

Half of European investors are preparing for continued high inflation amid risk of ineffective monetary policy.

A survey commissioned by WisdomTree[1], the exchange-traded fund (‘ETF’) and exchange-traded product (‘ETP’) sponsor, of professional investors across Europe highlights a lack of trust in central banks’ ability to stave off high inflation, with inflation (52%) and policy errors by central banks (51%) as the biggest risks facing investors.

With inflation in Europe now well above the 2% target levels[2], 72% of professional investors have begun preparing for high inflation, according to the survey. When asked how investors are preparing to mitigate the inflationary environment, 47% indicated by allocating to commodities. Whilst a further 23% are considering allocating to the asset class to lessen the impact of inflation on their portfolios.

Nitesh Shah (pictured), Head of Commodities & Macroeconomic Research, Europe, WisdomTree said: “One of the most talked-about characteristics of commodity investments is their capacity to hedge against inflation. Academics have long studied the link between commodities and inflation and concluded that over the long run, and over most historical periods, commodities are positively correlated to inflation. Broad commodities’ average monthly performance tends to increase when the consumer price index (CPI) increases, this is not the case for other assets including inflation-linked bonds or real estate.”

Despite commodities being well-known for their inflation hedging properties the preferred way for most European professional investors (55%) to access the asset class is through commodity-linked equities. However, commodity-linked equities and commodities do not have similar characteristics, which could come as a surprise to those who prefer to allocate in this way.  According to the survey, just 27% of European professional investors choose, or would choose, to invest via synthetic exposures, and 24% via physically-backed exposures – the most efficient methods to access commodities and hedge against inflation.

Pierre Debru, Head of Quantitative Research & Multi Asset Solutions, Europe, WisdomTree added: “Commodity-linked stocks are often used as an easy-access alternative to commodity investments. However, research has shown that they do not provide any direct exposure to commodities. An investment into commodity-linked stocks provides exposure mainly to the management, the business lines, and the practices of those companies. In many cases, those companies hedge part or all of their commodity exposure, i.e., they pay out the commodity risk premium to futures contract holders. Commodity-linked equities behave significantly more like equities than commodities, and as a result not an effective hedge against inflation.”

The most common assets for European professional investors to allocate to for inflation hedging purposes, as revealed by the survey, include equities (78%), inflation linked bonds (58%) and infrastructure (47%). Broad commodities (46%) and gold (28%), both historically good inflation hedges did not feature in the top three asset classes, though 33% of European professional investors expect to increase their allocations to energy and 29% will increase allocations to soft commodities in the next 12 months.

The survey, conducted by CoreData Research an independent research agency, polled 600 professional investors across Europe, ranging from wholesale financial advisory firms to wealth managers and family offices. The investors surveyed are responsible for approximately €400bn in assets under management.

 

[1] Source: CoreData Research, Pan-Europe Professional Investor Survey Research, June/July 2021

[2] The 2% inflation target as set by the European Central Bank and Bank of England

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