Inflation forecast signals time to cycle balance into portfolio

Inflation – an issue that’s been at the forefront of most investors’ minds (particularly retirees) over recent weeks. With the influx of cash flowing around from COVID stimulus measures and the swift recovery of our national economy, it’s inevitable we start seeing cost-of-living increase.

RBA guidance

Last week the Reserve Bank of Australia (RBA) removed its rate increase guidance and more recently we’ve seen some concerning CPI figures from the US. Domestically, we are currently sitting at annual CPI of 3.8% (outside of the targeted 2-3%), while in the US this figure has surged to an increase of 6.2% year on year, reaching a 30-year high in October. Much of this is what is termed transitional inflation, but we feel with wages growth and energy price rises (with an outlook for higher prices) inflation will return sooner than expected. With figures like this, the Fed will certainly be feeling the pressure to raise interest rates.

So, what does all this mean?

While rate rises typically see a capital flow out of markets and into defensive assets such as bonds and term deposits, it doesn’t mean it’s time to be out of the market all together. The market might have some volatility return, but I don’t see it as the catalyst for a correction. 

Look for balance

It is wise to start cycling your portfolio into a more balanced position. My team has been taking profits on some of our growth stocks that have run up well for clients and reallocated into stocks with more attractive price-earnings ratios. Before these decisions are made, it’s important to make sure your exposure takes into account upcoming capital requirements you might face.

On the defensive side of our portfolios, we are wary of locking in to long-dated bonds with fixed coupon rates, instead seeking floating rate instruments that will follow the rate rises up. If in doubt, talk to a financial planner about how to best manage the risk for your portfolio.

Read more about US inflation in the Sydney Morning Herald here.

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