We're Reoptimising Your Portfolios to Maintain Inflation Protection and Harness Valuation Opportunities

27 January 2022
Stephanie Leung
CIO Office

You might remember that in July 2021, we reoptimised your portfolios with stronger inflation protection as the US moved into an inflationary growth environment. An inflationary growth environment means that the economy was growing, but inflation was growing at an even faster rate. When that happens, inflation erodes the quality of growth, and “real” growth declines.

Our macroeconomic indicators show that the rest of the world is now following suit: inflation is  outpacing growth not only in the US, but also across global markets. And in the US, inflation continues to deepen, reaching its highest level of inflation in nearly four decades.

Global economies are heading into an inflationary growth regime


Learn more about our investment framework and the 4 economic regimes: StashAway’s ERAA® (Economic Regime-based Asset Allocation)

Inflation is likely to persist throughout 2022

Policymakers have acknowledged that it’s taking longer to move on from inflation than expected.  Global events, such as a new COVID variant continuing to disrupt supply chains, labour shortages contributing to higher wages, and stimulus measures keeping the economy rolling amid a global pandemic, continue to push up prices worldwide.

To curb inflation’s effects, central banks around the world will likely hike interest rates in 2022. Hiking interest rates can help rein in inflation by making it more expensive for people and businesses to borrow and spend money, reducing cash flow throughout the economy.

The markets are anticipating that the US will hike its interest rate 4 times this year. The Bank of England has already raised interest rates, with investors expecting another 4 increases this year there, too. And the European Central Bank may come under pressure to hike interest rates across the Euro Area with consumer prices having increased at a record pace of 5% through December 2021.

It’s worth noting that China, on the other hand, is going in the other direction: The country’s central bank has cut the interest rate for the first time in 2 years. It’s part of the country’s plan to boost the economy following a property slump and persistent virus outbreaks that have been met with strict lockdowns.

Here’s what it all means for our portfolios

Now, with rising inflation, we’re reoptimising your portfolios to continue maintaining effective inflation protection.

As always, when we reoptimise, we do so in a way that’s mindful of valuation. So, we’re reoptimising your portfolios with assets that have relatively attractive valuations, and minimising exposure to overvalued ones.

Here’s what you’ll see in your portfolios:

Adjustments to our existing inflation hedges

Our investment framework, ERAA®, is reducing allocations to developed and emerging market government bonds in favour of high-quality US corporate bonds and inflation-linked government bonds. ERAA® is reducing its allocation to US consumer staples (XLP), US REITs (VNQ), and slightly in US energy (XLE) due to their high valuations, and is in favour of higher allocations to US small-cap (IJR) and financial stocks (XLF).

Adjustments to our international equities allocation

Due to valuation changes, ERAA® is reducing allocations to Australian and Japanese equities, favouring a higher allocation to Canadian equities. ERAA® maintains its allocation to China technology because its low valuation presents significant medium-term opportunities.

We’re keeping an eye on the data

It’s easy to get caught up in news about the pandemic, inflation, and interest rates, and their effect on the markets. But remember, inflation-adjusted growth is the ultimate driver of returns in the medium and long term.

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