Time for a conservative option emerges
In these uncertain times, understanding how to invest conservatively is more important than ever. Eyb & Wallwitz, a renowned investment firm, has emphasized conservative strategies for its Phaidros Funds, including the recent rebalancing of the Phaidros Funds Conservative in the spring.
The low interest rate level means lower yield opportunities on the bond side, necessitating keeping the portfolio's interest rate risks in check. Gold has become cheaper to hold and serves as a medium-term hedge against increased inflation. Recognizing the signs of the times is crucial for conservative investing, as elevated inflation could particularly affect growth stocks that have been popular in recent years.
Inflationary periods require a strategic approach to investing. For growth stocks, while they can offer some inflation protection, high inflation can increase costs, and rapidly rising interest rates may dampen growth stock valuations. Investors should emphasize equities over fixed income, considering sectors less sensitive to inflation shocks or those that can pass costs to customers.
Industrial companies often benefit during inflationary periods because their revenues and cash flows tend to rise with inflation, especially if demand remains strong. Sector rotation towards such companies can help manage inflation risk. Gold is a traditional inflation hedge as it tends to maintain purchasing power when inflation rises, making it recommended to maintain allocations to real assets like gold to hedge against unexpected inflation shocks.
High-yield bonds carry more credit risk, which can be exacerbated by inflation and rising interest rates. Inflation erodes fixed income real returns, so it is generally advisable to limit exposure or select bonds with shorter durations or inflation-linked features.
The Phaidros Funds Conservative has been adjusted to account for the current economic climate, but specific details about the fund's changes were not available. As with any investment, it's essential to review the fund's prospectus or consult a financial advisor for precise advice.
The multi-billion dollar pandemic aid programs and green deals in the US and Europe offer a promising outlook for the coming years, especially for companies that produce both technology and software. Some old economy industrial companies are making a comeback on the stock exchange, with those companies that provide the necessary modern infrastructure for the digitalization of the economy particularly favored.
If inflation remains elevated in the medium term, central banks may raise interest rates earlier. This debate about potential interest rate hikes by central banks is ongoing. High-yield bonds are less affected by a rise in interest rates, but more attention should be paid to creditworthiness at current valuations. Only the best issuers from the high-yield segment should be included in the portfolio.
In conclusion, a strategic approach during inflation includes emphasizing real assets (gold, commodities, real estate), diversifying equity exposure towards sectors benefiting from inflation (industrials, small-cap value stocks), cautiously managing fixed income risk especially in long-duration or low-credit quality bonds, and considering inflation-linked instruments. Regular portfolio review and risk management are crucial due to inflation and interest rate volatility.
- To manage risk in a conservative investment strategy during inflation, it's important to maintain allocations to real assets like gold, diversify equity exposure towards sectors beneficial from inflation, such as industrials, and cautiously manage fixed income risk by limiting exposure to long-duration or low-credit quality bonds.
- For finance and business, investors should prioritize control over their portfolios during inflation by regularly reviewing their holdings for risk management purposes, considering sectors less sensitive to inflation shocks or those that can pass costs to customers, and emphasizing equities over fixed income.
