The rising risks of inflation and the Russia-Ukraine conflict requires taking an alternative look at asset allocations
While the direct influence of the COVID-19 pandemic may be receding, new risks are starting to weigh more heavily on investors’ minds. And with those threats in mind, one investment advisor from Sightline Wealth Management is looking at several strategies and asset classes to help stabilize clients’ portfolios.
“One of the primary risks to investors in the comings months and possibly years is inflation, and the impact inflation will have on the purchasing power of their investments,” Katherine Gordon told Wealth Professional.
Focusing on the fixed-income sleeve, Gordon says traditional bonds are likely not going to be appropriate for many investors. With the current yield of the 10-year Canada bond hovering between 2.60% and 2.70% and inflation in the U.S. at 8.5%, investors would be facing a significant negative real yield on traditional sovereign bonds. To achieve positive real returns, she suggests alternatives such as private debt, private mortgage strategies, and income-producing real estate.
“The more aggressive investor might consider purchasing an ETF that shorts the long bond,” she says.
Looking at the equity allocation, she said investors should consider moving into more defensive sectors. Given the nature of the current inflationary cycle, she says it could make sense to move into dividend aristocrats – blue-chip, dividend-paying companies with a long history of increasing dividends year over year – as well as commodity-based sectors such as energy and agriculture-related stocks.
As the aftershocks of Covid-19 and the ongoing conflict in Ukraine put pressure on the global supply chain, commodities have taken the spotlight over the past few months. Gordon has her eye on gold in particular: aside from the precious metal’s track record that ties into the history of money itself, central banks around the world hold 35,000 metric tonnes of it – one fifth of all the gold ever mined – which speaks volumes about its safety.
“One of Russia's responses to being shut out of the SWIFT system was to back the rouble by gold,” she says. “This is not surprising, because under Basel III regulations, gold is considered a tier one asset, meaning it is held on balance sheets at zero risk.”
Gordon does not anticipate Russia’s switch to the gold standard will be permanent. That’s because under that system, roubles can be exchanged for gold for a fixed price, and Russia will likely not be interested in having to tap into their gold reserves to legitimize the value of their currency.
With economic and market risks being as high as they have ever been in many investors’ lifetimes, Gordon argues political, economic, and social uncertainty will weigh on portfolios well into the future. For advisors with clients accustomed to fair-weather returns and volatility, she says managing expectations will be more challenging than ever – though that doesn’t mean achieving reasonably positive results will be impossible.
“Gone are the days when a simple 60/40 equity to bond portfolio would provide the real return income and growth over the last 30 years,” she says. “If the economy remains relatively strong with modest growth, it will be possible to generate a reasonable real return with selective strategies.”
