The word ’inflation’ had barely featured in the market’s vocabulary in the last three decades, until it suddenly came back with a vengeance in 2021.

As higher inflation looks set to persist in 2022, finding ways to generate a return on investment greater than inflation will be a key theme for investors - otherwise the value of your wealth will fall in real terms.

Here we look in greater depth at why we think inflation will be a major theme in 2022 and introduce three key investment ideas which seek to beat it.

What has caused recent

rises in inflation?

It started with economic reopening after the COVID-19 lockdowns. Goods, ships, lorries and drivers were not located in the right places when countries opened up, causing massive delays, product shortages and inevitably higher prices along the way.

In addition, many of us have been buying more products than before COVID-19, placing additional pressure on supplies.

The cost of services we hadn’t used in a long time, such as air fares, car rentals, accommodation, restaurants, has also surged, some of it due to prices collapsing during 2020.

Markets also began to worry about the possibility of soaring rents and wages.

Central banks kept saying that inflation was ’transitory’, but this now seems to have been replaced by the word ’persistent’. Inflation will remain high on the economic agenda this year.

Why will investors need to

consider how to beat inflation?

Most analysts agree that inflation may not have reached its peak yet, so the situation for investors exposed to inflation may get worse in 2022 before it gets better.

Some say the CPI could rise up to 6-7%, but the one number that matters for markets is the US core personal consumption expenditures (PCE) index, which is the price gauge used by the US Federal Reserve (Fed) to shape its monetary policy. It soared to above 4% recently and may still have some upside left.

It is likely to fall this year however, in particular from March to June, as the comparison with 2021 becomes more favourable.

The same analysts, however, agree that inflation will probably not fall back to the previous sub-2% levels and may therefore be consistently above the 2% target used by most central banks.

What is the problem with

saving and investing at 3% or 4% inflation, rather than 2%?

If you leave your money in the bank, you are highly unlikely to get deposit rates that will cover these price rises and beat inflation.

Likewise, if you buy fixed interest securities, where the coupon and the final repayment levels are fixed, you may not get your money back in real terms.

Commodities generally manage to eke out a positive return after inflation, but it’s not always easy for an investor to buy petroleum and industrial metals profitably. Gold is a much easier purchase and tends to provide returns that offset inflation in the long run.

Are equities the best

investment option if your goal is to beat inflation?

History shows us that the best way to protect portfolios against inflation is through buying equities (shares).

This is because businesses that can pass on their increased costs, have the power to put prices up and can deal with complicated supply chains may be able to provide good returns throughout inflationary periods.

There are nevertheless risks for investors.

Higher inflation tends to reduce share valuations, which are ultimately a calculation of future earnings at today’s interest rate: if interest rates go up, share values, historically, go down.

Here at Canaccord, we will try to protect portfolios against inflation this year by exploring three different equity-based investment options:

Global equities may be a catch-all phrase, but the data shows us that well-selected global stocks can provide inflation protection.

Automation and robotics offer opportunities for modernisation and increased efficiency in many sectors

Infrastructure builds fixed assets that reduce operating costs and hence offset higher prices, while infrastructure investments often have an explicit inflation protection built in.

Markets often fear inflation because central banks, especially the Fed (US Federal Reserve), can destroy investment returns by raising rates to high levels and triggering an economic slump.

This time around though, the Fed, and other central banks, has told us in no uncertain terms that it will be patient with nascent inflation, at least for the next few years.

Let’s take them at their word, rather than trying to second-guess them.

The equity plays we mention should be able to cope with various inflation scenarios, as long as the Fed does not step on the brakes abruptly to cause a recession.