What my clients are doing about inflation

Pictured above is the Zimbabwe one hundred trillion dollar note I bought myself many years ago. I bought it for two reasons: firstly, so I could boast to my friends that I had become a trillionaire, but secondly to remind myself of the threat of inflation.

Although we’re some way from hitting Zimbabwe-level hyperinflation, which peaked at 89.7 sextillion percent year-on-year in November of 2008,¹ rising inflation in the UK will nonetheless cause real hardship for millions of households. CPI inflation is expected to rise to 13% in the fourth quarter of 2022, and remain elevated throughout much of 2023,² while the dreaded recession word is rearing its ugly head, limiting the Bank of England’s room for manoeuvre.

With my colleagues in our Asset Allocation team having given their take on investing amid rising inflation, I wanted to share what I’m hearing on the road from our clients as they brace themselves for a long period of higher prices.

Where investors sought shelter

By April of last year UK inflation had begun its upward march,³ and it was around this time that I began fielding calls from clients looking for refuge from the likelihood of higher inflation to come.

Starting with the obvious, US Treasury Inflation-Protected Securities (TIPS) were one area of interest, along with their domestic counterparts, UK linkers (inflation-linked bonds). Physical property, which has historically offered a degree of refuge in inflationary environments, was another part of the market that saw heightened interest as inflation began to rise.

I also received many calls from clients looking to increase their exposure to commodities. As one client put it, if you’re going to feel the pain when filling up your car or buying a loaf of bread, you might as well offset it with gains from your commodities investments.

Longer-term considerations

As well as witnessing investors’ initial responses to surging inflation, I’ve also seen some longer-term issues rising up the agenda.

One such debate concerns the outlook for fixed income. The combination of higher inflation and increasing hawkishness from central banks created a perfect storm for fixed income investors over the past year, leading to negative total returns for many fixed income strategies. However, as yields rise and the proportion of negative-yielding debt declines worldwide, it’s possible that a greater portion of investors’ income needs could be met by fixed income. 

Another big question emerging from the inflationary spiral concerns benchmarks. In recent years, many conservatively managed funds have moved away from traditional indices in favour of CPI benchmarks, with the aim of performing in line with inflation. This year, however, matching CPI has proved very difficult, even with products that have some inflation protection, as they are generally capped well below the current level of inflation.

Don’t panic, Mr. Mainwaring!

While the details of fund benchmarking are probably of limited interest to much of the general public, the wider challenges brought about by today’s inflationary environment are relevant for everyone. Most instant-access bank accounts fall short of offering terms in line with the Bank of England base rate, let alone today’s annual CPI inflation rate of 9.9%.⁴

At times like this, a level-headed, long-term approach to investing is valuable; for those of you old enough to remember Dad’s Army, the words of Clive Dunn, aka Corporate Jones, sum it up well.

Today, my clients spend a lot of time telling their clients that buying low and selling high is easy to do in theory, but difficult to stomach in an environment of heightened financial anxiety. I keep reminding myself that it’s time in the market, not timing the market, which is key to long-term returns.

1. Source: https://www.cato.org/sites/cato.org/files/serials/files/cato-journal/2009/5/cj29n2-8.pdf

2. Source: Monetary Policy Committee announcements, 04 August 2022

3. Source: CPI ANNUAL RATE 00: ALL ITEMS 2015=100 - Office for National Statistics (ons.gov.uk)

4. Source: https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/latest