Because real estate has low correlation with equities and bonds, it is thought to be a good way to hedge against inflation. As a result, investor interest is skyrocketing despite a scorching real estate market, a scarcity of homes, and the possibility of rising mortgage rates.
Is real estate a suitable investment during an inflationary period?
With inflation, real estate works wonderfully. This is due to the fact that as inflation rises, property prices rise as well, lowering the amount a landlord may demand for rent. As a result, the landlord will be able to collect a bigger rental revenue over time. This allows you to keep up with the rising cost of living.
What exactly are inflation hedges?
- Inflation hedges are investments that safeguard investors from the depreciation of their money as a result of inflation.
- During inflationary cycles, the investments are expected to preserve or increase in value.
- Inflation hedging is a strategy used by investors to maintain the value of their investments while keeping operating costs low.
How do you protect yourself from hyperinflation?
If rising inflation persists, it will almost certainly lead to higher interest rates, therefore investors should think about how to effectively position their portfolios if this happens. Despite enormous budget deficits and cheap interest rates, the economy spent much of the 2010s without high sustained inflation.
If you expect inflation to continue, it may be a good time to borrow, as long as you can avoid being directly exposed to it. What is the explanation for this? You’re effectively repaying your loan with cheaper dollars in the future if you borrow at a fixed interest rate. It gets even better if you use certain types of debt to invest in assets like real estate that are anticipated to appreciate over time.
Here are some of the best inflation hedges you may use to reduce the impact of inflation.
TIPS
TIPS, or Treasury inflation-protected securities, are a good strategy to preserve your government bond investment if inflation is expected to accelerate. TIPS are U.S. government bonds that are indexed to inflation, which means that if inflation rises (or falls), so will the effective interest rate paid on them.
TIPS bonds are issued in maturities of 5, 10, and 30 years and pay interest every six months. They’re considered one of the safest investments in the world because they’re backed by the US federal government (just like other government debt).
Floating-rate bonds
Bonds typically have a fixed payment for the duration of the bond, making them vulnerable to inflation on the broad side. A floating rate bond, on the other hand, can help to reduce this effect by increasing the dividend in response to increases in interest rates induced by rising inflation.
ETFs or mutual funds, which often possess a diverse range of such bonds, are one way to purchase them. You’ll gain some diversity in addition to inflation protection, which means your portfolio may benefit from lower risk.
During hyperinflation, what happens to real estate prices?
Rising rental property rates are likely positives during periods of high inflation. It might be difficult to obtain a mortgage during periods of high inflation. Because high mortgage rates limit buyers’ purchasing power, many people continue to rent. Increased rental rates arise from the boost in demand, which is wonderful for landlords. While appreciation is a different market study, in general, in an inflationary economy, housing values tend to rise. People require roofs over their heads regardless of the value of their currency, hence real estate has intrinsic value. You’ll almost certainly have a line out the door if you can offer advantageous rates for private mortgages.
The increasing cost of borrowing debt is one of the potential downsides for a real estate investor during inflationary times. To avoid being shorted, the bank will charge higher interest rates and provide fewer loans. Another downside is the increased cost of construction materials for new residences. New building can be a tough investment during inflation due to the high cost of borrowing and the increased expense of construction. When money is tight, travel is frequently one of the first things to go. Vacation rentals, tourist destinations, and retirement communities may not perform as well as other real estate investments.
What investments do well in the face of inflation?
- In the past, tangible assets such as real estate and commodities were seen to be inflation hedges.
- Certain sector stocks, inflation-indexed bonds, and securitized debt are examples of specialty securities that can keep a portfolio’s buying power.
- Direct and indirect investments in inflation-sensitive investments are available in a variety of ways.
How will you protect yourself from inflation in 2022?
During the epidemic, there was a surge in demand for products and labor, resulting in the fastest rate of consumer price and wage inflation since the early 1990s. As the pandemic passes and spending moves toward services rather than products, we believe inflation will reduce due to greater labor supply. In the end, it should not jeopardize our base case scenario, which predicts a significantly more vibrant cycle in the 2020s than we experienced in the 2010s.
However, both prices and salaries are expected to rise at a pretty rapid pace. We believe there are three ways for investors to navigate this climate.
Look to real estate for inflation protection
Because leases are regularly reset higher, real estate investors often profit from a natural inflation hedge. Furthermore, we believe the residential and industrial real estate sectors will benefit from strong structural tailwinds. Following the global financial crisis, chronic underbuilding (compared to trend) resulted in a housing shortage in the United States. Workers’ labor is in high demand, and earnings are rising, ensuring that housing remains cheap even as home prices rise. Migration enabled by remote work is also offering opportunities.
The global trend toward e-commerce will demand additional warehouses, storage, and logistics in the industrial sector. The need for further investment is highlighted by problems in the global supply chain that became apparent in 2021. We’re also seeing an increase in demand for life science research facilities. While we prefer to invest in real estate through private markets, publicly traded real estate investment trusts (REITs) have outperformed other equities sectors during periods of rising inflation. In a nutshell, real estate is our favourite option to invest in a higher-inflation climate.
Rely on equities, especially cyclical ones, to drive capital appreciation.
While economists dispute the complexities of inflation, the fundamental principles underlying the current phase appear to be clear: Strong demand and economic growth are driving inflation. Because corporate earnings are also good in inflationary settings, equities tend to do well. We anticipate that stocks of companies that are more closely linked to economic activity and interest rates will likely outperform. Bank stock valuations, for example, have generally been linked to inflation forecasts. In cyclical industries like industrials and commodities, companies with pricing power could see strong revenue increases. Stocks that do well when growth and inflation are rare (think the digital economy) may, on the other hand, be at more risk. In our opinion, you should maintain a fair balance between the two categories, and expect a hard environment for fixed income portfolios as interest rates climb.
Avoid excess cash, and consider borrowing.
In our Long-Term Capital Market Assumptions, 80 percent of the assets we consider have a higher predicted return than inflation. Investing surplus cash in a portfolio that meets your goals and time horizon is the simplest approach to protect purchasing power. Borrowing may be prudent in the current situation. Interest rates remain low, particularly when compared to inflation. A mortgage is a straightforward approach to profit from a healthy home market. If the Federal Reserve reacts to rising inflation by boosting interest rates, borrowing expenses may become less appealing.
Key takeaways
Higher inflation is likely to persist through 2022, but it does not have to be a reason for alarm. Investors can create a portfolio that considers inflation risks and attempts to manage them. While excess cash appears unappealing, relying on equities rather than fixed income and focusing on cyclical sectors and real estate could prove to be profitable strategies. Meanwhile, while policy interest rates are still low, borrowing and settling existing liabilities may be prudent.
In the context of your individual circumstances and aspirations, your J.P. Morgan team can provide you with more information on how the present environment is influencing risk and return possibilities.
What is the safest investment?
Cash, Treasury bonds, money market funds, and gold are all examples of safe assets. Risk-free assets, such as sovereign debt instruments issued by governments of industrialized countries, are the safest assets.
How can I keep my investments safe from UK inflation?
Inflation may have dropped in recent months, but savers still have a fight on their hands if they wish to avoid its corrosive effects.
We’ll look at how taking certain risks with your money can help you keep your money’s value above inflation.
Shift longer term savings into equities
You might have some money in a savings account. After all, it’s recommended that you save away roughly six months’ worth of earnings as an emergency fund. However, you may discover that you have more than you require. If that’s the case, think about putting some of it into investments that have a better chance of long-term growth.
Equities have historically been the most successful assets for fighting inflation over the long term but you must be comfortable with your investments rising and falling in value.
Choose your investments wisely
Other investments, if you know where to search, can produce returns that are higher than inflation. Bond funds, for example, could be included in a portfolio of investments because they invest in debt issued by governments and/or enterprises seeking to raise financing. Throughout their lives, bonds pay a defined rate of interest, known as the coupon, and should refund the original capital at maturity. To spread risk, bond funds invest in a variety of debt instruments.
A financial adviser can help you create a portfolio that takes advantage of all available investment opportunities.
Maximise tax efficiency
After you’ve figured out how to fight inflation, think about how tax-efficient your assets are. ISAs and pensions are both tax-advantaged vehicles for saving and investing for the long term.
ISAs allow you to save up to 20,000 a year in tax-free growth and income on investments, as well as tax-free withdrawals. Meanwhile, depending on your taxable income, pension payments may be eligible for income tax relief of up to 45 percent.
When you can afford it and while they’re still accessible, it’s a good idea to take advantage of hefty tax breaks over time. This way, you may take advantage of compound growth or earning returns on your returns to help you keep up with inflation.
Seek expert advice
A sound investment strategy should include a diverse portfolio of assets and the use of tax-advantaged investment vehicles.
We can put together a diversified portfolio that is geared to your long-term financial goals, risk tolerance, and inflation protection. Get in contact with us right now to learn more.
Is debt a form of inflation protection?
Debt would appear to be the polar opposite of an investment. When inflation is high, though, incurring it can be a smart financial decision.
As long as the debt has a set interest rate, Selita points out that inflation makes it cheaper to service that is, pay some types of debt. Inflation eats away at the value of your cash in the same manner as it eats away at the value of your loan. This is beneficial to people who took out loans or mortgages before the inflationary period began.
For example, $1 in 1990 is roughly $2 now, so a $1,000 mortgage payment made 30 years ago is worth around $2,000 today. However, you’d still be paying $1,000 each month after all that time. As a result, the cost of what you must pay is cut in half. You’re effectively paying half as much to repay the loan each month.
If you have the option, refinance your loan or mortgage to a fixed rate instead of a variable rate. This will let you take advantage of inflation.
Should I sell my home when inflation is high?
The most obvious advantage is that your home’s value rises in tandem with inflation. With low supply and high demand, sellers can set their asking prices as high as they like and, in many circumstances, receive offers that are equal to or even more than their asking price.