Is it time to review your investment portfolio?
Søren Otto Simonsen
Senior Investment Editor
Summary: Inflation is surging and as an investor it is important to prepare your portfolio. And it is even more important this time, as it may not be as straight forward as the books would lead you to believe.
You need to be aware of inflation as an investor. But it does not need to be a scary thing. In fact, inflation is an important factor in the way the world’s economies are built – and without it, we would be in a much worse situation. Apart from that, inflation can also provide investment opportunities. So, if you, like we do, believe that inflation is here to stay and will keep pushing prices upwards, it could be potentially be relevant for you to review your portfolio and make sure it is positioned towards it.
Time to diversify your portfolio?
There is one important paradox that is important to deal with, when looking at the current development within inflation and your portfolio. Usually, inflation would favour equity markets, but right now it is more important to look at how the central banks will get inflation under control, rather than looking at the wild running inflation itself.
“We have long believed that the current inflation is more structural than temporary, which is contrary to especially the American Fed. This also means that we believe there is a much larger need for tightening the financial conditions than legislators believe. Such tightening will hurt companies across the globe and thus we expect the equity markets to suffer,” says Economist, Christopher Dembik.
On top of that, the green transformation makes it harder for the central banks to tighten fiscal policy, as the former takes priority. “Since late 2020, the Saxo Strategy Team has held the view that the real economy is far too small for the financial and economic agendas of governments, central banks and the green transformation. This prompted our call for higher inflation throughout 2021, which crystallised with the inflation spike in the second half of 2021, capped by a 7 percent US December CPI print,” Chief Investment Officer, Steen Jakobsen said in our Q1 2022 Quarterly Outlook.
This means, according to Dembik that we should expect the opposite of a positive run for equities: a risk sell-off and the re-introduction of other asset classes’ strength in a portfolio. “With the expectation of fiscal tightening - even though less than we think is necessary – and potentially the first real move back towards historical averages for equities, the concept of a diversified portfolio – not within equities – but across asset classes, could be a key step towards getting the best risk-adjusted return for all investors,” he says.
If you want more inspiration from Jakobsen about this topic, go check out his SaxoSession about inflation, where you can also get inspiration to create a portfolio, which is sturdy today as well as tomorrow, from his 100-year portfolio.
If you want to read our Head of Equity Strategy, Peter Garnry's, more detalied view on the equity side of inflation, take a look at this article.
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.