Building inflation buffers for portfolios

With ongoing deficit spending and an uptick in economic growth, investors are looking for ways to hedge against inflation — or even to benefit from it.

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Michael Sager, vice-president, multi-asset and currency with CIBC Asset Management, said alternative asset classes and strategies are one answer.

When looking at asset classes, Sager said to prioritize high inflation beta: when inflation increases, the asset’s return increases disproportionately.

Both oil and gold have relatively high inflation beta and a relatively high inflation success rate, Sager said, meaning they tend to outperform other asset classes when inflation and inflation volatility are high. 

Real assets, particularly infrastructure, are another example.

“You often have explicit links to inflation in infrastructure contracts,” said Sager, who manages the CIBC Multi-Asset Absolute Return Strategy fund. “So infrastructure as an investment within real assets tends to do relatively well when inflation and inflation volatility are relatively high.”

Sager also recommended absolute return investment strategies, which are designed to perform well regardless of the market environment

“To give an example, absolute return strategies would include global macro investing, where you’re trying to capture the impact of a global macro event,” said Sager. “Risk and inflation, and inflation volatility, would certainly come under that umbrella.”

However, it is Sager’s view that inflation has likely reached its peak, at least in the U.S. and Canada, and a gradual weakening in inflation pressure is likely to be seen over the next year. 

“But that doesn’t mean inflation is not relevant as a risk,” he said. 

Another factor that may impact investments through 2022 is central bank policy. The Fed has signalled its policy fairly well and should be priced into markets, he said, “but of course, there’s always risks.”

For equities, where “valuations are becoming increasingly stretched,” Sager said the “tug of war” between cyclical growth and valuation will be a key driver.

“A number of equity markets — particularly, for example, U.S. large caps — are at relatively high valuations,” he said. “So that will present an increasing headwind to equities as we progress through 2022.”

Nevertheless, for equities and pro-risk assets, Sager has a “broadly supportive” outlook.

This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.