"As the extremely volatile nature of macro and market events continues to threaten returns, it is likely that we will see investors take bolder steps towards increasing inflation risk mitigation strategies"
At the time, the response from major economies around the world was to pursue methods of quantitative easing – floating their economies with cash via a series of bond buying programs while lowering interest rates in order to inject further cash into the economy. Throughout this period interest rates remained consistently low, from 2008 – 2022 the Bank of England kept interest rates below 0.8% in the UK. Overall, these measures provided the perfect backdrop for investors who with small borrowing costs could purchase any major stock or index fund and await leisurely from afar for its value to rise amid money cash creation from central banks.
Clearly, investors should prepare to navigate unfamiliar terrain. Both inflation and interest rates are spiralling – with the former set to hit 13% per year once the energy price cap is lifted later in October.
History has shown similar periods to be bad news for stock markets, and with a recession looming, investors must begin to diversify their portfolios in order to protect their returns. Most importantly, investors must recognise that this changing economic landscape will not facilitate easy index/stock holding returns – they must adapt.
Not so alternative: the rising star of investment
Alternative investments are financial assets that do not fit into the conventional equity income and cash categories. As the eponymous name suggests, they once played a niche role among investors compared to the more traditional assets. This is for several reasons; firstly, alternative investments capture a wide net of assets - they can range from fine art, collectables, and real estate - many of these assets require an arcane knowledge of their respective markets. Secondly, many of these opportunities have historically required enormous buy-in prices.
However, alternative investments are growing rapidly in popularity, they are expected to reach a value of $26.21 trillion in 2026. This growth is likely propelled by their comparative ability to withstand slow economies and fulfil key roles in an investor’s portfolio, such as capital growth, income generation, risk diversification or increased safety.
As I mentioned before, alternative asset classes have traditionally been enjoyed by a select few, given that these investments are often more complex and less accessible than traditional ones. However, technological innovations are lowering the barriers of entry to a wider pool of investors.
As the extremely volatile nature of macro and market events continues to threaten returns, it is likely that we will see investors take bolder steps towards increasing inflation risk mitigation strategies over the next twelve months, with alternatives well poised to play a bigger role in investors’ portfolios.
Finding shelter in real estate
Real estate has a long history of offering shelter from inflation, given the asset class usually has little correlation with stocks and bonds. For one, in the long term, inflation and housing tend to move in the same direction. Indeed, property values over time tend to stay on an upward curve, with real estate investments capable of keeping pace or even exceeding inflation in terms of appreciation.
Consider the rental market, it has historically shown a remarkable correlation with inflation and in some cases has even risen above it. For property owners, this offers income protection, ensuring that its true value is not lessened by inflation.
Naturally, investors will be contending with rising costs, however, in times of economic uncertainty, property fundamentals tend to remain strong - a clear example is the UK real estate’s remarkable performance since the outset of the pandemic. The relentless house price increases are largely underpinned by the strong levels of demand that continue to outstrip supply, which provides strong potential for capital appreciation. Indeed, average UK house prices have risen by over 61% over the past decade, in the same period, growth in the UK stock market has been almost half that value.
With an economic downturn on the horizon, the diversification of portfolios is now a strategic necessity. To brave this changing economic climate, investors who have employed similar tactics for years must begin to expand and challenge their outlooks. Against this backdrop, the disruptive attributes of prop-tech will serve investors well by challenging traditional entry barriers and opening the door to new, simpler and affordable ways to invest in property.
