This week will see all eyes on central banks, with the Reserve Bank of Australia (RBA), the US Federal Reserve (Fed) and UK Bank of England (BoE) all expected to announce rate hikes in an attempt to combat high rates of inflation.

In all three countries inflation rates in recent months have hit highs well above target rates: Australia at 5.1 percent, the UK at 5.5 percent and the US surging to 7.9 percent. At these levels it is almost certain that all three central banks will start to hike rates.

Market expectations are mixed, but many expect rises of 0.15 per to 0.25 percent from the RBA, 0.25 percent to 0.5 percent from the BoE and a large 0.5 percent to a Fed funds target range of 0.75-1.0 percent in the USA.

There are two concerns about these rate hikes. The first being that they may take the steam out of equity markets and led to falls in already volatile stock prices seen in early 2022.

The second, more alarming concern, is that the rate hikes may do little to calm inflation but lead to falls in growth. This could lead to the return of stagflation, which has not been widely seen since the 1970s – the phenomenon of low or negative growth alongside persistent inflation.

Inflation Hedges

There are several ways to look to protect against inflation. In the very long term, a diversified stock portfolio is the safest bet, but in the medium term there could be better bets.

Inflation linked fixed-income is often seen as a safe bet, such as US TIPS (Treasury Inflation-Protected Securities) and UK ILGs (Index Linked Gilts). A problem here is that the demand for these has been very high recently, with many seeing the asset class as over-bought.

Commodities, including gold, are often seen as stores of values during times of high inflation. However, market timing can be difficult, as the markets can be very volatile, and missing localised tops and bottoms of the markets can be expensive.

Real estate has also been seen as a good investment as inflation climbs, as both rental prices and property values tend to rise in step with inflation. With the advent of REITs and REIT ETFs it is easier to gain exposure to real estate than it was a generation ago.

But possibly one of the more interesting investment opportunities are one of the newer diversified alternative investment funds. These seek to invest across a range of alternative assets, avoiding the higher risk of placing an investment in a single alternative asset, for example the volatile Bitcoin.

One such fund was in the news last week, when the recently launched ALTS 1 Fund from the alternative investment management firm Alts, attracted a $3 million investment from Hedonova, the alternative assets hedge fund. ALTS 1 is typically of diversified alternative funds, investing across assets as diverse as collectable items, cryptocurrencies and NFTs, fine artwork, wine and whisky, and music rights.

Wyatt Cavalier commented: “Most financial advisors recommend alternative assets make up between 10 percent to 15 percent of your portfolio. Alternative assets like collectables, wines, art, crypto, cultural items, and music royalties are largely uncorrelated with equity markets and are near perfect hedges against inflation.” 

These are a selection of conventional and unconventional inflation hedges. It will remain to be seen how soon, or indeed if, the expected rate hikes this week will tame inflation.