With the CPI now estimated to hit 11 per cent this autumn, fund managers will need to "seek the wisdom of their elders" to know how to structure portfolios.
This is the view of Henry Cobbe, head of research at Elston Consulting, who said too few investors - both retail and professional - have ever experienced investing amid economic circumstances like these.
He commented: "Today’s generation of managers have not lived through a high inflation regime in developed markets and should seek out the wisdom of their elders and of the past."
"Stable and consistent inflation expectations has been a bedrock of capital market assumptions and return expectations since the 1990s."
FTAdviser previously reported that gold, global equities and residential property (capital growth) annual returns beat inflation in the year to the end of March 2022.
For example, in March, while inflation was at 7 per cent, UK and global equities real returns were still going strong at 8.39 per cent and 6.03 per cent, respectively.
However, after a decrease in returns, coupled with CPI scaling up to 9 per cent, together with increasing global uncertainty, both UK and global equities faltered as major indices dipped into the red in April and May.
Times of ultra-high inflation, not to mention geo-political strife, investors are having to quickly re-write their own rule books. — Becky O’Connor.When adjusted for inflation, UK and global equities finished down at -0.28 per cent and -2.6 per cent, respectively by the end of April, according to interactive investor’s ‘Real Returns Ready Reckoner'.
But as Elston says, with inflation continuing to rise despite moves from the Fed, the EU and the UK to combat it by raising interest rates further, the perceived wisdom that 'cash is a haven; equities are risky' seems to have been turned on its head.
He explained: "For the first time since the early 1970s that’s been turned on its head. Ironically in high inflation regimes, cash becomes a higher risk asset (fails to preserve real value), and equities become a lower risk assets (because the right ones can keep pace with inflation).
"Different asset classes have different levels of inflation resilience over different time frames. It is on this basis that we incorporated a layered approach to inflation protection by combining a range of inflation-sensitive asset classes within our Liquid Real Assets Index."
Alternative choices
As at the end of April, residential property returns had taken a slight fall (see table below), but remained positive at 3.1 per cent when adjusted for inflation.
Gold softened a little but was still the strongest performer since the beginning of the year by far, having real returns of 10.42 per cent as at the end of April.
Parmenion's senior investment manager Simon Molica, said: "There are some asset classes which typically offer inflation protection, such as property, infrastructure, gold and commodities, these are generally real assets in nature.
"In very high levels of inflation over extended periods, this may become more challenging to continue to offer inflation protection here."
"Equities typically can handle some inflation and certain sectors will be safer than others, particularly those that can pass on rising cost inputs to their end clients. Therefore, not overly effecting their earnings quality. When earnings are negatively impacted from inflation this is when equities may re-price."
"UK equities are more reasonably priced and therefore could protect better, and the UK equity market may also benefit from being more commodity and financially related exposures, which may well stand to benefit from the current inflationary pressures."
"Ultimately, if inflation stays stubbornly high and central banks remain on the journey of hiking interest rates, this could be a difficult scenario for both bonds and equities. Bonds because of their interest sensitivity characteristics and equities will be impacted by a changing discount rate which will hamper future cash flows."
Find how other investments fared here:
| Asset/ product type | Annual return, to 30 April 2022 | Annual return to end of Dec 2021 | Real annual return after UK CPI inflation, to 30 April 2022 | Real annual return to end of Dec 2021 |
| Average easy access cash savings accounts (interest)* | 0.39% | 0.17% | -8.61% | -5.23% |
| Average 1-yr fixed rate bond (interest)* | 1.24% | 0.59% | -7.76% | -4.81% |
| Global equities (MSCI World Index)** | 6.4% | 22.9% | -2.6% | 17.5% |
| UK equities (FTSE All Share)** | 8.72% | 18.32% | -0.28% | 12.92% |
| Residential property – capital growth*** | 12.1% | 10.4% | 3.1% | 5% |
| Residential property – rental yield, gross (to Feb 22)**** | 4.93% | 4.98% | -4.07% | -0.42% |
| Gold ** | 19.42% | -2.87% | 10.42% | -8.27% |
| Global corporate bonds** | -3.86% | -2.06% | -12.86% | -7.46% |
Source: Interactive Investor research, May 2022
Becky O’Connor, head of pensions and savings at interactive investor: “In these times of ultra-high inflation, not to mention geo-political strife, investors are having to quickly re-write their own rule books.”
“The problem is if you react to events after they have happened, you may have already missed the boat as the tide turns and end up crystallising losses through selling the assets that have fallen in value, then buying other assets at higher valuations, after they have found favour.”
Cobbe added: "The main problem is with traditional nominal bonds. In normal times; these provide steady income, capital preservation and diversification."
"In an inflationary regime you are paying (in real terms) to own bonds (negative real yields), they fail to preserve capital in real terms and as we’ve seen, they fail to provide diversification."
"Managers need to consider alternatives to bonds to build in inflation resilience: for example liquid real assets (including property infrastructure and gold), and (good) absolute return funds that can deliver a premium to bonds."
