As worries over rising inflation rate continue, M&G underweights sectors which are vulnerable to inflationary pressures, or companies that faces a lot of cost pressure and without the pricing power to pass it on to their own customers.
As a result, it favours fixed-income assets, such as inflation-linked bonds and Treasury inflation protected securities (Tips), to protect against soaring inflation.
The other tool to hedge inflation is emerging market bonds.
“Emerging markets can generate positive real yields of 2% to 3%, while traditional developed markets bonds in UK and Europe see a minus 2% real yields,” said Jim Leaviss, CIO, public fixed income at M&G Investments.
“Although there’s going to be a lot of risk and volatility when investing in emerging market debt, it looks to us to be the best place for value in fixed income at the moment.”
In terms of sectors, the asset manager prefers exposure to global infrastructure to withstand the impact of variable rates.
“Real assets do well during an inflationary period, and particularly now we’re having a strong push on infrastructure spending. This includes the renewables sector where we expect to continue to see a lot of opportunities,” said Fabiana Fedeli, CIO, equities and multi-asset at M&G Investments.
The other area of opportunity identified by M&G is Japan, which has underperformed global markets for many years.
“However, there are more companies with strong, increasing earnings, and there has been an improvement in corporate governance, shareholders’ returns, more efficient balance sheets, and an increase in mergers and acquisitions, which are unlocking synergies.”
Yet Fedeli said it is not the case for all companies in Japan, and investors need to be selective.
The principle of diversification is to hold assets that have low correlation with each other, so that one asset class can help offset some of the losses during periods of weakness in another.
Cash and bonds
Nevertheless, M&G recommends holding a portion of the fund in cash, as well as maintaining exposure to the longer end of developed market government bonds, including 30-year US treasuries bonds, said Maria Municchi, multi-asset fund manager at M&G Investments.
Municchi also recommends taking advantage of shorter-term market moves to grasp the opportunity that the market provides, as both equities and fixed income currently present difficulties from a valuation standpoint.