There has been a large amount of talk about inflation in recent weeks. In this article, we explore what is meant by inflation, why inflation is an important consideration and which assets have historically fared well in an inflationary environment. We also discuss one of deVere's latest structured investment products which have been specifically designed to help clients capitalise on an inflationary environment.
What is inflation?
Inflation is a decline in the purchasing power of a given currency. Another, and perhaps easier way to understand inflation is by measuring the rate at which goods and services increase in price. When inflation increases quickly this is problematic as consumer’s purchasing power decreases unless their wages also increase. Declining purchasing power leads to lower living standards.
Why inflation is an important consideration for investors
Higher inflation is usually viewed in a negative way for the stock market because it increases borrowing costs, increases input costs (materials, labour), and reduces standards of living. But probably and most importantly in this market, it reduces expectations of earnings growth, putting downward pressure on stock prices.
In July, U.S. consumer prices jumped at the highest rate since 2008. In the US, prices are up 5.8% year-on-year (US Labor Department CPI figures). These figures have sparked long-term inflation concerns. The debate we are currently keeping a close eye on is whether high inflation is short or long term.
Which assets have historically fared well in an inflationary environment?
Historically, tangible assets including commodities and property have performed well as inflation hedges. Prices for raw materials like oil, metals and agricultural products usually increase along with inflation, so they can be a good hedge against it.
Despite COVID restrictions easing around the world, there are still several issues within global supply chains. These persistent issues coupled with increasing consumer demand, are creating imbalances between supply and demand.
deVere's Inflation Hedge Structured Product
deVere has launched a structured product that offers clients the opportunity to earn up to 23.5% per annum in USD, in the form of quarterly coupons of 5.875%. This product offers clients significant downside protection of 35%.
This product is linked to the performance of Vale SA, AP Moller – Maersk & Devon Energy Corp. In flat, raising or slightly falling equity markets, investors will receive an enhanced return.
These three stocks have been specifically selected for an inflationary environment. Vale SA and Devon Oil operate in the commodities sector whilst Maersk is the world's largest shipping company.
Within the PDF below we explore the investment case for all three stocks whilst also going into greater detail about how the product works.
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