It's not too early to consider inflation protection

CIO MONTHLY | SEPTEMBER 2020

The H1 2020 pandemic-led recession has almost certainly secured a low inflation outlook for the next year. However, with the potential for central banks to peg policy rates near zero and craft an inflation overshoot beyond that, there is an increasing risk we will see inflation expectations rising further through 2021, with material implications for valuations both across different assets and within sectors.


  • With most economies operating well below their potential, and with huge swathes of spare capacity and underemployed workers, it’s hard to see how inflation is going to average anywhere near most central banks’ inflation targets for at least a year. But looking beyond the near term, an inflation renaissance seems increasingly likely.
  • Some of the catalysts for rising inflation have their foundation in good old-fashioned economic theory. Others are more a product of the chaotic and ever-changing global economy we live in. These include the massive monetary and fiscal stimulus we have seen globally from central banks and governments; demand pressures as economies bounce back in 2021; rising supply-chain costs; and the slowdown in globalisation.
  • Although inflation hedges can be costly to hold when inflation is at its lower ranges, there are many relatively low-cost hedges which we believe warrant a moderate allocation to portfolios now. These can then potentially be increased should inflation begin to rise further through 2021.
  • Some of the inflation protection that could be added now include 1) maintaining allocations to equities; 2) avoiding too much exposure to expensive technology; 3) ensuring some exposure to energy and materials; 4) building a portfolio that allocates to real assets; 5) staying short duration in fixed income; and finally 6) adding some exposure to physically-backed gold (but not too much).