Following the widespread impact of Covid-19, global economies are gearing up for a short-term future set to the backdrop of accelerated inflation. The longer-term consequences of these record-breaking inflation increases are unknown, but what appears certain is that we’re set for a difficult start to 2022 as living costs continue to rise.
As labor shortages and supply chain squeezes continue to disrupt the pricing of goods and services, we’re likely to see the prolonged elevation to inflation - ranging well into the mid-single digits.
(Image: Bloomberg Quint)
As Bloomberg Quint data shows, inflation is currently rife across G20 economies. With no end in sight for the growing cost of living, a greater emphasis has been placed on hedges against inflation.
Traditionally, gold, commodities, and growth stocks have been regarded as excellent hedges against inflation among financial experts, but with FAANG stocks taking a battering and the price of gold tumbling from its 2020 highs, is this still the case?
Let’s take a deeper look at the best hedges against inflation across the world of investing today:
Gold’s Dwindling Effectiveness
Although gold is often regarded as an excellent hedge against inflation, the asset has failed to live up to its reputation in recent years.
Theoretically, as a precious metal, gold stands as an independent entity away from the economies and markets that can be impacted by political and ecological events. With this in mind, gold should be a safe hedge against the financial impact of Covid-19, and the inflation that it’s caused.
(Image: CNBC)
However, as we can see from the chart above, gold returns during inflationary periods have been consistently negative since 1980, and the asset’s recent performance is showing little sign of a turnaround in fortunes.
(Image: Gold.co.uk)
As we can see from the recent price performance of gold/USD, the asset has failed to maintain its price from a three-year peak at $2,067.16 in August 2020. Likewise, gold failed to appreciate in value in 2021 from its opening price to closing price.
However, it’s also worth noting that gold is an exceptional performer when it comes to appreciating in value over the long term. Over the past 25 years, the value of gold per ounce has climbed some 406% - meaning that the asset can certainly be regarded as a solid long-term investment during times of inflation. Despite this, the notion of gold being a leading hedge against devalued domestic currency may be a little dated.
Trusting FAANG to Deliver a Recovery
In the 21st Century, FAANG companies have offered investors easy access to extraordinary growth. Stocks like Alphabet and Amazon, in particular, have performed exceptionally well in the years that followed the 2008 stock market crash, but the traditional blue-chip favorites have so far struggled to offer investors support in the face of 2021’s inflation squeeze.
In December 2021, Morningstar reported that, combined, FAANG stocks (that is, Meta (formerly Facebook), Apple, Amazon, Netflix, and Alphabet (formerly Google)) have contributed “2.7% of returns in 2021, down from 24% in 2020.”
However, Maxim Manturov, head of investment advice at Freedom Finance Europe, believes leading tech stocks like those of FAANG companies may perform better during periods of inflation purely because they can actually benefit from price squeezes.
“Stocks, in general, have the most upside potential over the long term. Companies that benefit from inflation require little capital (while natural resource companies are more likely to lose from inflation),” Manturov explained.
“The S&P 500 currently has a high concentration of technology companies and communication services. (They account for about 35% of the index). Both technology and communication services are businesses with small capital requirements, so in theory, they should benefit from inflation.”
Should FAANG companies begin reaping the aforementioned benefits of inflation, it may mean that their current devalued stock prices could offer a great buy opportunity for investors with an upside that’s likely to be realized on a shorter-term basis than, say, gold.
Could Commodities be a Shrewd Inflation Hedge?
Whilst gold can be included in the roll-call of commodities to protect investors from inflation, let’s focus on the often forgotten alternatives like oil, grain, gas, and even coffee as solid options for investors to protect their wealth as living costs rise.
When looking at inflation forecasts for 2022, supply chain shortages point to many commodities becoming significantly more scarce, and thus, more expensive in the short term.
(Image: Trading Economics)
As we can see from the price history of gasoline/USD, the cost of a gallon of gas has climbed from less than one dollar in March 2020 to over $2.25 at the time of writing.
According to Vanguard Quantitative Equity Group research, the inflation beta of commodities was between 7 and 9 over the past 10 years. “This suggests that a 1% rise in unexpected inflation would produce a 7% to 9% rise in commodities,” the group suggested in its insights.
Though, it’s also important to acknowledge the sharp fall in value of gasoline during the global lockdowns of 2020 as an indicator that the Covid-19 pandemic can cause traditional commodities to behave in a far more erratic manner. Should the ongoing omicron variant of Covid-19 lead to more disruption on a global scale, this may negatively impact the price of commodities - leading to a change in their ability to act as a sufficient inflation hedge.
In a landscape that’s been heavily impacted by the ongoing global pandemic, there are no certainties when it comes to hedging against inflation, but growth stock investing is a tried and tested approach that’s repeatedly stood up to scrutiny over the course of the 21st Century so far.
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