Is your portfolio positioned for inflation?
With the economy moving at such a rapid pace, inflation may become a factor in coming periods. Investors may consider tilting portfolios to inflation responsive assets to ensure they do not fall into negative real-return territory.
As the economic rebound from COVID-19 continues, so too does the narrative change about the length, depth and severity of economic challenges ahead.
To date, we have witnessed a V-shaped rebound of the Australian economy, driving a surging residential property market and supported by a range of other data points. Against a backdrop of rolling lockdowns nationally and the ongoing pandemic risk we live with, Australia’s economic outcomes have continued to surpass almost all reasonable expectations.
The economic rebound from COVID-19 has been so strong that our economy is now larger than it was before the pandemic and with more people in employment.
Throughout this rebound the economic conversation has entirely shifted from the threat of a deep, long-lasting recession to a conversation around economic growth and now even inflation.
Investors, too, have begun shifting their attention towards inflation responsive products which will protect real returns when inflation ultimately does return in a meaningful way.
The resilience of the Australian economy and the strength of its rebound is observed across a range of sectors. Consider the rebound of those industries severely impacted by lockdowns such as accommodation, hospitality services, and the arts and recreation.
Each of these are rebounding strongly and represent genuine contributions towards our employment numbers across the country. Likewise, the rebounds observed across the balance of the economy are broad based, significant and demonstrative of a diversified economy undergoing a V-shaped economic rebound.
The cumulative impact of a wide range of sectors rebounding is a national economy growing quarter-on-quarter and above trend.
The success of Australia’s economic rebound is also notable in the context of the wider global economic recovery. Consider Australia’s Real GDP, which is a measure of actual GDP adjusted for inflation, against G7 nations.
The G7 nations account for nearly half of all global GDP in their own right, however, are experiencing recessions which are deeper, and with rebounds taking longer, than our more resilient economy has achieved.
Some readers will recall the effects of inflation which impacted economies globally through the 1970s and 80s, curtailed only following a global recession and significant policy grind internationally.
In isolation, the current trajectory of inflation is no cause for alarm as we have witnessed a cycle of benign readings, however there are signs both locally and internationally that inflation may begin to turn upwards in the periods ahead.
Consider the impact of full employment, high labour participation rates and the lack of migration locally. Over a longer period, this could be the catalyst for a range of productivity improvements which boost efficiencies and GDP per capita, however in the short term may drive up wages and impact inflation.
A range of international factors are also poised to impact inflation, such as the rebounding US economy which drives international prices through its interest rate settings and currency. We are also cognisant of the Chinese economy which in May 2021 experienced its largest year-on-year factory-gate price gains in over a decade on the back of surging commodity prices.
This initially impacts prices of consumer goods, but with iron ore passing through US$200 per tonne for the first time ever in 2021, we will no doubt see the impact of this in higher prices across other industries and sectors too that rely on this commodity.
While we may still be some way off an impactful inflation event, the prospect of rising inflation should be something investors begin taking into consideration when planning their portfolio construction.
Inflation can erode the real return of income products and be a trigger for central banks to raise interest rates. Indeed, a range of economic commentators are now suggesting that inflation may impact interest rates much sooner than had previously been anticipated.
In these moments investors can have the dual impacts of reducing real returns and potentially missing the upside of preferential movements in interest rates.
With seven decades’ experience and a proven track record across all market cycles, La Trobe Financial continues to provide low-volatility, inflation responsive income solutions for investors. La Trobe's portfolio accounts offer monthly income for investors with variable rates of return set monthly, and our Peer to Peer account continues to allow investors the power to select investments with the income and duration to suit their investment objectives. Now with over $12 billion in assets under management including $6 billion in the award-winning credit fund, La Trobe Financial continues to be a proven investment partner for 55,000 investors across Australia and around the world.
*Michael Watson is the Executive General Manager, Head of Distribution - Asia Pacific at La Trobe Financial