Across the globe, inflation has reached levels not seen for 40 years. And for many investors in Asia, their portfolios were constructed during a time when inflation was not on the radar. Now, with economies decelerating and inflation becoming an obstinate hurdle, investors are searching to figure out how to protect their financial assets.

At the tail end of 2021, inflation was predicted to be transitory, although no specific time was offered as to when the transition would end and its description was dependent on one’s particular code of belief, similar to the current debate on whether or not a recession is “technically defined” as two consecutive quarters of negative economic growth. 

That said, a significant number of economists still believe that inflation has now peaked and should start levelling out soon before starting to decline by early 2023.

However, continuing geopolitical issues like war in Ukraine, persistent supply-chain issues, spikes in Covid-19 infections and China standing by its zero-Covid policy support the view of the skeptics who see inflation being even higher, for even longer.

And while there isn’t an off-the-shelf magic formula or financial vaccine to make investors immune from inflation, some fine-tuning may help them withstand its wealth-decaying influence.

Soft landing or slump

Alternative investments like gold, fine art, collectible wine and, in particular, real estate are usually suggested as assets that can outperform inflation, but so can certain financial products.

“Traditionally, real assets, such as precious metals, real estate, land and natural resources, are seen as inflation hedges,” says Michael Foo, chief investment officer, at Singapore-based HP Wealth Management. “However, their track record is rather mixed. Gold, for example, tends to do well at the onset of inflation. But once inflation appears and persists, its performance may be driven by other factors.”

Commodities and inflation can have a strong correlation, he points out, especially in a cost-push inflation situation. And since Russia invaded Ukraine in February, energy and food prices have surged. This has added to inflationary pressures arising from the pop in demand following the economic re-opening from Covid-induced lockdowns, However, commodities are extremely volatile and sensitive to both demand and supply factors.

“Aggressive rate hikes by central banks to dampen demand and tame inflation can also affect prices negatively,” Foo states. “Real estate may be the best option among these real assets, but, even then, it offers only protection rather than a complete hedge.

“The bottom line is that there is no perfect strategy to beat inflation. Gold and commodities could do well at the onset of inflation, which means you need to have them in your portfolio beforehand. However, they are not good candidates for strategic buy and hold. Real estate, on the other hand, is a good candidate as a strategic asset with its income generation, but it requires a sizeable amount and long-term commitment. The best way to beat inflation is to either have perfect foresight, or to ride it out with a well-designed long-term strategic portfolio.”      

Meanwhile, Hartmut Issel, head of equity and credit for Asia-Pacific at UBS Global Wealth Management’s chief investment office, thinks the main driver of markets in the second half of this year will be investor perceptions of whether we are headed for stagflation, reflation, a soft landing or a slump. 

That said, in view of high inflation eating directly into cash, Issel believes that it is important for investors to stay invested.  

“While the economic outlook for H2 might be challenging, we stress the importance of being invested, arguably more defensively at this stage in view of elevated inflation levels,”  Issel argues. “Against the current macroeconomic environment, investors may wish to diversify with alternatives through hedge funds.

“Investors should build a robust portfolio that can grow regardless of where the global economy heads. They should prioritize a liquidity portfolio that meets three to five years of cash flow needs, consisting of a mix of cash and short-duration bonds. Adding to defensive and quality value stocks should be considered, while capital-protected strategies can be used to mitigate downside risks.”

As well, investors with holding power, he thinks, could use the sell-off to build longer-term positions in areas where structural fundamentals remain intact, such as 5G, green tech, the ABCs (artificial intelligence, big data, cyber security) of tech, and China’s digital economy leaders.

Resilient real estate

In an inflationary environment, the real estate asset class, contends Pierre Escande, head of real estate at Union Bancaire Privée, has the potential to act as a protective hedge against rising prices.

“CPI [consumer price index]-linked leases and lease renewals at higher rental levels allow for income protection,” he advises. “Triple net leases also make it possible to pass expenses, such as maintenance costs, straight through to tenants, protecting the net income from the property. In addition, net operating income increases help to mitigate potential short-term valuation drops as yields might rise with interest rates hikes.”

Unsurprisingly, independent real estate consultancy Knight Frank maintains that real estate as an asset class has remained resilient in times of volatility, so staying invested in it is a sensible strategy.

When it comes to hedging and inflation-beating qualities, commercial real estate has outperformed other asset classes historically over the longer term, says Neil Brookes, global head of capital markets, at Knight Frank.

Well-leased prime commercial spaces in core markets, according to the firm, are defensive options and investors should also be cognizant of asset quality and green credentials that can sustain occupancy levels and command a price premium.

“There is now an opportunity to ride on the retail and hospitality recovery as the pandemic subsides,” Brookes notes. “Alternative sectors, such as student accommodation and life sciences, will also be sought after because they have higher yields with the potential to generate income growth. Repurposing from hotel to long-term rental apartment or co-living also presents opportunities to pivot underperforming asset classes to booming asset classes.”

“Commercial property benefits from the same forces that drive inflation, such as rising construction costs, which will translate into higher selling prices down the road,” he adds. “All these characteristics are expected to support prices and sustain spreads.”

Wait for better entry points

Vishal Nanwani, senior portfolio manager at multi-family office Global Equator Wealth, says: “One of the most common phrases in financial markets has been ‘Don’t fight the Fed’. We’ve seen the strength of their policy (effective or not) in the quick rise in asset prices through 2020 and the collapse this year.”

The phase of aggressive increases in real asset prices has passed, Nanwani believes, and he would keep only minimal allocation to real assets. 

“With the Fed and other major central banks continually tightening, we’re heading towards a period of low growth at best and a recessionary phase at worst,” he notes. “Currently, we are at a point where rates are rising, inflation is high, and growth is slowing. This is an unhealthy condition for all asset classes where the least impacted is cash on an aggregate level.

“As a multi-family office, we are focused on long-term investment and wealth preservation for our clients. Hence, we are comfortable with higher cash holdings while waiting for better entry points to deploy capital.”