When examining these figures, it is important to remember that each central bank will have its own target rate of inflation. Take for example the current situation in New Zealand – rising inflation has been enough to prompt the Reserve Bank of New Zealand to project an interest rate hike this year, as well as four additional hikes in 2022. These projections came after inflation spiked the 1-3% target, hitting 3.3% year on year.
Should investors turn to safe haven assets?
In reality, though, more investors will be more concerned about how they can ensure the safety of their portfolio in the midst of inflationary pressures.
For many traders and investors, gold will be a popular hedge against in this environment, given that conventional wisdom dictates that bonds will not fare so well. Typically, gold – as well as property, commodities and precious metals – are considered ‘safe haven’ assets during inflationary periods. While this is generally true, investors should be aware that if this were truly the case, then we wouldn’t see the value of gold fluctuating as much over time.
With gold in particular, although this will be a good option for some, it is important to acknowledge that investors will gain no interest for holding it. Normally, investors will look to sell in order to buy more profitable assets once the economy stabilises – but if interest rates are low, then this is good for gold.
Considering asset classes
Investors should also be aware of the fact that the effects of inflation can vary drastically across sectors – meaning that stocks aren’t always a bad investment.
While growth stocks, which have much of their earnings expectations set out further into the future, may perform poorly, well-established value stocks might be a better option. Because these value stocks, which constitute more mature companies, tend to have a higher intrinsic value than their current trading price, they are usually a safe bet – outperforming growth and income stocks because they have strong free cash flows. That said, this will depend on whether an investor is taking a long- or short-term view of the market.
Some evidence lends itself to the view that taking a short-term view of the market will inevitably lead to increased volatility in the stock market. Granted, this will also create opportunities for buying or short-selling stocks.
Ultimately, investors must remember that although inflationary pressures have arrived, the stock market is cyclical. Indeed, bad times may have the potential to diminish returns, but they will not last forever, and there is a lot to be said for staying invested in the long-term.
