The professors make an important distinction here. Just because equities have beaten inflation over the long-term (and they have) does not mean that they are a hedge against inflation. It’s almost the opposite – the higher inflation is, the worse they perform.
If you think that is bad, look at bonds. Index-linked bonds aside (we will come to those later), they positively hate inflation. In the 5 per cent of years with the highest inflation, they delivered a real loss of 24.7 per cent.
A traditional 60/40 portfolio does not look well placed to withstand very high inflation. It might not lose money in nominal terms in that environment. But in real terms, if it performed in line with those historical averages, it would be down nearly 16 per cent.
What about property? Surely good old bricks and mortar is a better bet?
Well, yes and no. Alistair Laing, manager of Capital Gearing Trust, points out that the fact that property has physical substance makes it no more likely to withstand inflation. It is the future cash flows we expect from that property that we should care about.
In theory, residential property should be able to keep up with inflation, as house prices and rents are ultimately linked to wages – what people can afford. Commercial property, too, could be resilient, especially good-quality properties with upward-only rent reviews.
But the trouble is that there are many other factors at play here. Recent history in the UK suggests that the ratio of house prices to incomes can be pretty unstable.
It also suggests that rents do not always keep up with inflation – they have risen just 2 per cent over the past year, according to ONS data. These linkages might work over long enough timescales – but as with equities, that is not the same thing as providing an inflation hedge.
Commercial property, meanwhile, is very exposed to the ups and downs of the economy.
If periods of high inflation end in a bust, as they often do, you would be unwise to bet the house (sorry) on this asset class – though it makes sense as part of a diversified portfolio.
UK commercial property is one of the few investment company sectors to have delivered a positive return since the start of the year, a gain of 2 per cent.
