Keith Wade, chief economist and strategist at Schroders, believes investors could look to commodities as a source of diversification as the ever-continuing debate about the correlation between equities and fixed income rumbles on.
Speaking at the Lang Cat’s Home Truths conference in London, Wade said with inflation set to be more of a problem than it has been for the last decade, investors may need to start thinking “outside of the box” in terms of the assets they hold.
After the readjustment crated by the central banks hiking interest rates, Wade said there is a “little bit” of a sign that bonds and equities are starting to behave as they did before, but not quite as much.
“I think we have to think pretty hard about what other assets are out there, and how we might be able to get hedges against our risk and think of other ways of trying to find that,” he said.
While inflation may fall slightly this year, it is Wade’s belief that inflation is set to become much more of a problem over the next decade.
“Going forward, a lot of the things that kept inflation down will probably reverse,” he said. “For example, we’re seeing a lot of negative news about China at the moment. China has been a huge force in keeping inflation down over the last couple of decades and if we don’t trade with them as much, we’ll probably have more inflation.”
So where do investors go? Wade said an area that has worked quite well in the past in this kind of environment are commodities.
“I think the whole commodity space is one people need to look at,” he said. “Either direct investment in commodities or in some funds, such as energy or mining, as they have a good correlation with the underlying price of oil or copper.”
While noting that it is not always easy to get the vehicle investors need to invest in the asset directly, Wade added the multi-asset team has been looking at investing in sector funds and things like that because that would correlate quite well, if inflation picked up.
Outside of commodities, Wade said cash remains a useful tool for investors if inflation remains higher than expected. In this scenario, which could promote central banks to raise rates higher than expected, he said holders of cash would take some of the benefit.
“The other asset we’ve used quite a lot at Schroders in our multi-asset area is just holding dollars or being invested in US dollar assets,” he added. “One of the features of the markets is that when things go wrong and you’ve got a lot of bad news, the dollar tends to perform well.
“It’s a safe haven and that was something that we did see last year, and we’re still seeing a little bit of it.”