Currently, value areas can be found in financial, retail and industrial sectors, which tend to have a strong cyclical element. We recently added to our equity value exposure in the UK and Europe and, for specific exposure to higher interest rates, investment trusts that invest directly in the equity of banks and insurers might be worth considering.
We like the profile of asset-backed securities, which would improve in an inflationary environment where wages and asset values are rising. They have also been left behind over recent months from a valuation standpoint. As an added bonus, those bonds pay variable coupons (floating rates) as opposed to fixed ones, as is the case with conventional bonds.
As such, they offer protection against interest rate rises, unlike the rest of the fixed income universe. In that space, we have increased our position in a bond fund that has substantial exposure to these.
One approach to the volatility in the energy market is to get exposure to an infrastructure investment trust, which invests in UK infrastructure bond projects, generally with long-term, public-sector-backed revenues. The revenues from such infrastructure assets are often inflation linked and government backed.
One can also get this exposure by investing directly in the shares of utility companies.
There are also a range of more general infrastructure trusts on the market.
Commodities as an inflation hedge
Exposure to commodities and miners provide a further line of defence against rising prices. Recovering global economic growth, historic stimulus packages and the switch from a fossil fuel economy to a materials-intensive economy are all factors that boost the investment case for commodities.
Because commodities are essential inputs into the manufacturing and distribution of most manufactured goods, commodity prices tend to rise with inflation, and indeed are widely viewed as an indicator of the future direction of inflation.
One way to gain this exposure to commodities is to invest in a trust that is very generalised in terms of its exposure to commodities, and one that is more niche.
Gold in particular has historically offered a good hedge against sustained inflation as it is seen as a good store of value when purchasing power gets eroded. As such, when inflation affects the value of fiat currencies, investors tend to seek gold for protection. It is viewed this way due to its scarcity value. With this in mind, we have recently invested in a dedicated gold and silver fund.
