In a period of sky-high inflation, investors are looking for what real assets can offer: the potential for income and diversification.
The Bureau of Labor Statistics’ Consumer Price Index (CPI) increased by 8.5% in March compared to one year prior, marking the fastest annual jump since 1981, eclipsing the previous 40-year record high rate of 7.9% in February, the U.S. Bureau of Labor Statistics reported today.
The energy index rose 11.0% in March following a 3.5% increase in February — the highest month-over-month increase in history behind September 2005, which was impacted by the devastation of Hurricane Katrina, Christopher Huemmer, senior investment strategist for FlexShares’ ETFs, said today at Exchange: An ETF Experience.
“Stock and bond prices are positively correlated, and that’s because it’s not growth that is driving interest rate hikes, it is inflation,” Huemmer said.
Real assets are a great way to augment a 60/40 portfolio for better support during inflationary periods, according to Huemmer.
“Real assets are the classic inflation hedge,” Lara Crigger, editor-in-chief of ETF Trends and ETF Database, said. “When people think inflation is going up, they think real assets, and [real assets have] been doing really well year-to-date and on a one-year basis; we’ve seen the GSCI is up over 50% in the past year.”
For investors wondering if it’s too late to add real asset exposure to a portfolio, Huemmer said to look at the drivers of the increase this year.
“The supply chain issue still exists today,” Huemmer said, pointing to China’s zero-COVID policy, in which the country locks down when COVID rates reach a certain level, recently impacting machines and two of the largest seaports in Asia.
And while the old adage says that the cure for high energy prices is high energy prices — meaning that when there are high energy prices, every producer or exploration company drills more, creating an oversaturation of oil bringing prices down — that’s not happening in the current environment.
“Over the last 20 years, oil companies have become smarter to say, ‘Hey, let’s not overly invest,’ so CAPEX spending is down significantly,” Huemmer said.
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