An additional benefit of inflation-linked bonds is that their returns do not automatically correlate with those of conventional stocks or other fixed income assets, as changes in their market value will reflect a combination of investors’ expectations of future interest rates and future inflation. Linkers also aid diversification to balance or rebalance portfolios.
2. Corporate inflation-linked bonds
Stepping away from government debt, it is really worth considering the inflation-linked national infrastructure debt market – notably utility sector linkers.
One utility company currently active in the space is Anglian Water. As a regulated utility company, it is allowed to raise its prices in line with inflation indices – making inflation-linked debt issuance particularly attractive.
Anglian Water’s debt also combines forward-looking environmental, social and governance characteristics, as this company is actively raising capital to fund physical risks related to climate change.
The company has set targets to help make the East of England more resilient to the risks of drought and flooding, for example.
For borrowers, the benefits are potentially doubled, as they gain protection from inflation while contributing towards a more sustainable world. How borrowers address such environmental issues is now a fundamental part of credit assessment.
3. Currency hedging
It is also worth considering the impact of the weakening pound in terms of value destruction of UK-based stocks. What about investing in stocks listed in international stock exchanges in which inflation is lower and markets are steadier?
If inflation is going to be higher in the UK than in other countries, then conventional economic wisdom tells us that the pound will continue to depreciate against other currencies, so that price comparison is maintained on international commodities.
High inflation here inevitably makes it difficult for UK companies to maintain their profit margins as costs in their supply chain rise.
So, if you are planning to move more funds into sectors that tend to do better in downturns anyway, most notably utilities, consumer staples, health care and technology companies enabling digital transformation, you could consider selecting overseas stocks that are not listed on UK-based exchanges.
4. Residential property
Despite all the dire warnings of UK property market “corrections” of up to 10 per cent, there is a seemingly immoveable (over) demand versus (under) supply problem in the UK. Or in the words of Mark Twain: “Buy land, they aren’t making it anymore.”
For the past 100 years we have witnessed a steady reduction in the size of the average household, as families become smaller and generations less likely to share. The problem of an undersupply of land for development continues to play out in rising property prices.
