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Quick Takes: Navigate Inflation Concerns With A Multi-Asset Approach – Seeking Alpha

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William_Potter

William_Potter
As we can all attest to, inflation has hit our pocketbooks, it’s hit the markets, it has become a central part of the political dialogue. In 2022, as you can see core inflation, both goods and services, have been on the rise and have
As we look to 2023, we still expect inflation to be high, although begin to moderate some.
The rise of inflation has led to significant changes in expectations for the Fed in terms of the amount of hikes and to the level for which they are going to hike over the course of 2022 and 2023.
This has had a negative impact on asset pricings broadly, as we’ve seen with the selloff in equity markets and the retracement in fixed-income markets.
The inflation backdrop has meaningful implications for investors.
We would expect equities to perform well in a high-growth and stable- and low-inflation environment, while fixed income the opposite in low growth. As a result, a traditional 60/40 portfolio would benefit from the diversification of owning both fixed income and equity.
The problem becomes when inflation rises and becomes less stable. In this environment, we have seen that the correlations between fixed income and equity reverse and become positive.
What asset classes could investors look to in this environment to help insulate the portfolio?
In an environment where you have high growth and high inflation, one of the best inflation-fighting assets tends to be commodities.
Now, in a low-growth, high-inflation environment, we would expect TIPS and gold to be an asset class that performs quite well.
The key takeaway for investors are as follows: given the highly uncertain macro backdrop, thinking beyond a 60/40 portfolio, including real assets, can provide broader diversification across economic environments. TIPS and commodities share a linkage with inflation but can react differently to surprises in GDP and the resulting risk-on or risk-off market environment.
Investors may want to consider a multi-real asset approach that can provide broader diversification to traditional equity and bond portfolios.
Past performance is not a guarantee or a reliable indicator of future results.
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Joseph Muongi

Financial.co.ke was founded by Mr. Joseph Muongi Kamau. He holds a Master of Science in Finance, Bachelors of Science in Actuarial Science and a Certificate of proficiencty in insurance. He's also the lead financial consultant.