Investment guide: Stocks and instruments to look at during periods of high inflation

Investment guide: Stocks and instruments to look at during periods of high inflation

It might be cliche, but it’s worth saying again. Rising inflation is the biggest challenge of our times, and investors of the current generation are experiencing something they might not have seen in their entire lives. The pace of increase in prices in the US is the highest in four decades. Yet, most market participants are conditioned to a world where inflation was consistently below or near the Fed’s 2 per cent target. The changed scenario calls for a new investment paradigm. Higher prices mean the US Federal Reserve will combat inflation by aggressively raising the Federal Funds rate and tapering bond purchases. Moreover, the US Central Bank might also reduce the monetary policy accommodation by reducing the balance sheet size. This process, termed ‘quantitative tightening’, involves selling bonds, which will reduce the amount of money in the economy. This operation is the exact opposite of ‘quantitative easing’. The net impact of these moves will be a rise in US Treasury yields, raising the cost of money. Or in other words, an average layperson will have to cough up higher interest charges on their loans. The challenge for an investor is to identify suitable investment themes in this climate. For