- UK inflation rises to 3.2% in UK, highest in nearly 10 years
- Rate hike likely to happen twice in 2021 and rising inflation will wipe out savings
- Experts suggest action to hedge inflationary pressures
Rising inflation and rising interest rates in the UK could raise the cost of living and put individuals’ assets at risk, forcing investors to scramble to protect portfolios.
Britain’s inflation rate rose to 3.2 per cent in August, the biggest monthly increase since records began.
The Bank of England believes the spike will pass, but many are questioning whether central banks are taking the rising cost of living seriously – and it looks like even the wealthy may be too complacent More than half said they were unconcerned about inflation.
ONS reports inflation growth in August, higher than analysts’ expectations
While the market is now raising two Bank of England interest rates next year, the rising cost of living for UK families is starting to feel sharp.
But YouGov research, conducted in conjunction with Canaccord Genuity Wealth Management, shows that the more affluent are not taking the risk of their wealth seriously.
A survey of 1,006 high net worth individuals – those with £750,000 in savings and assets, excluding their main household – found that 55 percent are unconcerned about the impact of inflation on their savings and investments.
The Bank of England is expected to raise interest rates twice in 2021 in response to rising inflation
David Goodfellow, Head of Wealth Planning at Canaccord GWM, said: ‘The simple law of economics dictates that if interest rates are lower than inflation, inflation will destroy the real value of your cash savings over time.
‘If savers have spare cash, they are likely to be better off investing at least one proportion in a diversified portfolio.’
Many wealthy individuals have large amounts of money in cash accounts, which are offering minimal returns with interest rates at rock bottom. Even the easiest-to-access savings deal pays just 0.65 percent — far less than the rate at which inflation reduces the value of cash.
But investors can also be at risk. Within the portfolio, investors’ exposure to bonds will be the most obvious disadvantage of rising inflation, especially if those bonds have low yields and are priced at lower rates and longer periods of accommodative monetary policy.
Long-term bonds are most sensitive to interest rate changes and investors can be prepared for more volatility in the coming months.
In terms of investing in the stock market, there are some stocks that can perform better than others in times of inflation.
John Plassard, deputy director of Mirabaud Group, pointed out that a hike in interest rates will potentially act as a ‘big tailwind for UK lenders’, while rising rates conversely ‘a significant burden for companies in sectors such as utilities and real estate’. ‘Which are sensitive to rising bond yields’.
Chief Analyst at Charles Stanley Direct Rob Morgan advises investors to prefer companies with ‘pricing power’, which enable them to pass rising costs on to consumers and thus protect their profits from inflation.
He added: ‘Banks are also potential beneficiaries of higher interest rates as they can earn a higher amount on their deposit and lending activities.
‘Inflation caused by rising commodity prices can be countered directly in a portfolio through some exposure to the mining and energy sectors.
‘The UK stock market has a lot of exposure to commodities and banks, while Japan has a lot of financial and industrial stocks that could benefit from a booming global economy and little inflation.’
Gold is often cited as an inflation hedge.
Gold is often touted as the ultimate inflation hedge asset, but Morgan explained that this is not always the case, especially in the short term and when interest rates are rising. Under these circumstances, gold can be a portfolio diversifier but it can also be very volatile.
As Morgan explained, asset funds that are exposed to assets such as warehouses, logistics, data centers and healthcare properties are a good option in striving for substantial income and capital growth to offset inflation, while infrastructure assets often have a fixed income. The quantity has a contractual inflation protection. In’.