How to 'inflation proof' a portfolio

Holding exposure to base metals or related equities could help investors to “inflation-proof” their portfolios, according to Amundi.

In an investment outlook, the firm said there had been rising commodity prices thanks to the global economic rebound with base metals such as copper seeing the positive effects of this.

“Base metals witnessed a jump in prices due to rising demand and concerns over supply shortages. This is the case for copper, for which the potential demand boost from strong fiscal stimulus and the transition towards greener economies, together with the still concentrated production should support copper prices in the long-term,” Amundi said.

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“This brings opportunities for investors, as exposure to base metals could help to inflation-proof portfolios,” said Pascal Blanque, group chief investment officer, and Vincent Mortier, deputy group chief investment officer at Amundi.

Commodities tended to be a cyclical asset and the firm said the value/growth rotation which had been playing out for the last few months still had “further to go”.

“We believe the rotation from growth to value has further to go as the excess overvaluation of growth versus value has not been reabsorbed yet and the improving earnings outlook further support some value names,” he said.

This rising inflation environment necessitated advisers making changes to asset allocation as fixed income would likely add little to returns and would be hindered by high duration with low yields. Instead, advisers were encouraged to build portfolio with increased equity exposure as a proxy for real assets, include real and alternative assets and consider unconstrained fixed income.

“Investors should structurally increase equity exposure through an inflation lens and build diversified portfolios, beyond the traditional benchmark allocation including real, alternative and higher yielding assets such as EM bonds,” Blanque said.

“We expect higher uncertainty as we pass through a couple of months of base effects and can start assessing how temporary the inflation rise is.”

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