Instead of seeking to hedge inflation risk directly, investors can search widely for assets that offer the best value and hence higher potential returns. The scope for higher returns provides a buffer in terms of inflation rising further or staying higher for longer.
Diversifiers based on scenario analysis are chosen to improve the robustness of portfolio outcomes, so they are not overly reliant or overly exposed to a specific economic and market environment.
In our multi-asset portfolios we favour UK, Chinese, German and Latin American equities and emerging market bonds from a return perspective, balanced with consumer staples, healthcare companies, high-quality shorter-dated bonds, and safe haven currencies.
Investors are better served by focusing on long-term outcomes, bottom-up market opportunities and multiple sources of diversification rather than relying upon highly uncertain inflation forecasts and assets that already reflect current high levels of inflation.
Mike Coop is chief investment officer, EMEA at Morningstar
All references to inflation are sourced from Morningstar and based on ONS data.
