Keiko Kondo, Schroders
Rising wage costs, slow recovering labour supply, and supply chain bottlenecks threaten higher inflation as the global economy gradually recovers. But, commodities offer a safe haven, according to Schroders.
“Commodities and energy-related stocks are quite attractive to capture the current expansion phase, while hedging inflation risk,” Keiko Kondo, head of multi-asset investments, Asia at Schroders, told a media briefing this week.
“Although commodities generally are not an essential part in a portfolio, during times of inflation and positive output gaps, commodities tend to do well.”
The asset class has already generated positive returns since the oil price dropped to negative in the first quarter last year, and is expected to perform better as inflation rises next year.
In particular, energy equities have been underperforming the commodity prices, creating attractive investment opportunities.
Kondo believes equities will continue generating returns at the beginning of next year, as long as corporate earnings are growing at a healthy pace.
Rising rates
But the performance may start to worsen later in the year when central banks tighten their monetary policies, she predicted.
Meanwhile, Schroders underweights fixed income for the coming year.
“We remain cautious on government bonds as bond yields may see upward pressure from the combination of rising inflation and real yields,” Kondo said.
“Consistent with this view, we find the financial sector as being better positioned within equities to withstand an environment of higher bond yields.”
Kondo also recommends investing in currencies to prepare against risks. She believes the US dollar would be a good hedge when interest rates hike next year, while investing in the Japanese yen would hedge for growth risk.
Carbon credits
In addition, Kondo favours carbon credits and allowances with the increasing importance of climate sustainability.
A carbon credit is a permit that allows the holder to emit a certain amount of carbon dioxide or other greenhouse gases over a period of time. It can be traded to offset the emission gap of a company.
“When we think about how much governments will be demanding that industries bring down their emissions in the coming years, the growth of carbon allowances still has room to go.”
Due to the low correlated to conventional asset classes, carbon allowances are also deemed to be less impacted by recent market volatility and uncertainty.
