Amid the challenging environment for stocks and bonds, commodities and other real assets have rallied sharply over the past 12 months as inflation has increased.
This rapidly emerging dynamic has focused the attention of investors on identifying the most attractively priced inflation hedges to make portfolios more resilient.
“One of our favourite expressions right now is: owning the currencies of large commodity exporters, both in developed and in emerging markets,” said Emmanuel Sharef, portfolio manager, asset allocation at Pimco.
That includes Australia and Canada, he added, but also, for instance, Chile, Peru, Columbia and other emerging markets (EM).
There are several reasons why Pimco likes this theme. First, these countries always have natural commodity and inflation beta.
Second, the disruption of supply from Russia is shifting demand to other commodity exporting countries.
And fially, the credit on many of these EM currencies has picked up as their central banks have hiked rates to control local inflation.
Investors can also capitalise on this theme by directly trading commodity curves, especially the longer end of the oil futures curve.
“We think oil prices could remain elevated for some time because it will take time for alternative sources of supply to come online, and meanwhile, demand can stay strong because the economy continues to reopen,” explained Sharef.
Eyeing energy and real estate
Longer term in the energy space, Pimco believes this trend also creates some compelling opportunities for green energy generation and green energy storage.
At the same time, real estate and Reits offer exposure to the shelter component of the CPI basket, which is the largest component of the CPI.
“In addition to that, they pay more attractive dividends now than they used to in the past,” added Sharef.
More broadly, EM currencies, green energy and real estate highlight the fact that periods of volatility oftentimes create compelling investment opportunities.
“We’re starting to see some of that,” added Erin Browne, portfolio manager, asset allocation at Pimco. “As active investors, we’re really excited right now.”
In terms of advice for navigating this unique period – especially for investors in the developed world who have not experienced this level of inflation during their career – Browne said that it is important to remain focused on the long term, to stay diversified and to retain sufficient dry powder to take advantage of market dislocations and opportunities.
