Nelson Mandela Bridge

Coronation logo

Inflation bears have been wrong for a long time. But the risks of higher inflation over the medium to longer term are building (read more here). If your investments are not correctly positioned for the possibility of higher inflation, you need to take note. 

Why are we more concerned today?

Global government debt has increased relentlessly in the response to Covid-19. Also, many structural drivers that underpinned decades of benign inflation have peaked or are starting to move in the opposite direction. 

All this new debt has to be repaid eventually

When debt can’t be repaid through growth alone and default is unpalatable, higher inflation provides a route out of the quandary. Couple higher prices with financial repression, where governments adopt policies that result in savers earning a rate of return below inflation, and debt can gently be inflated away over time.

But too many investors are incorrectly positioned 

Unless you have been primarily invested offshore or in cash over the last five years, returns have been disappointing. Over this period, most multi-asset portfolios are about 4% to 5% p.a. short of investors’ expectations.

As a result, many investors —retirees in particular— have de-risked by moving out of diversified multi-asset portfolios, resulting in very significant overweight positions in cash or income funds. By our calculations, between R200 and R300 billion worth of capital is currently too conservatively invested in South Africa. 

The potential problem over the medium to long term is that if you are not invested in real assets and inflation starts to tick up, the effect on your savings will be dramatic over time. Cash yields are much lower than they used to be (close to half of the level at the start of 2020) and will remain so for some time to come. 

Making your money work harder

In a tough economic environment, where financial repression (through lower interest rates over the longer term) may become a necessity, we question the ability of cash to provide appropriate inflation protection, especially when compared to alternatives such as more diversified multi-asset portfolios.

We believe it is more sensible to include real assets (such as selected global and domestic equities, infrastructure and property, or inflation-hedged asset classes such as inflation-linked bonds and precious metals) in your portfolio. The appropriate exposure level will depend on your ability to take risk.

It comes down to resilient portfolios

For 27 years, we’ve actively managed funds that can weather the times. To learn more about our approach to building resilient portfolios, visit coronation.com.

The information contained in this article is not based on the individual financial needs of any specific investor. To find out more, speak to your financial adviser. 

Coronation is an authorised financial services provider.

This post and content is sponsored, written and provided by Coronation.