Research Affiliates advises investors to target their portfolios for long-term inflation. Analysts advise investors to diversify by using more real assets such as real estate and commodities.
The rise in inflation in the Western world was no surprise to the research firm and investment advisor Research Affiliates. To ease the economic pain of the coronavirus pandemic, Western governments have aligned stimulus monetary and fiscal policies for understandable reasons.
As a result, money was deposited into bank accounts that were not covered by higher tax revenue. The logical consequence, according to Research Affiliates, was a combination of massive increases in the budget deficit, government debt, and then inflation.
GDP at the debt level
In the G7 (the United States, the United Kingdom, Germany, France, Canada, Japan and Italy), the level of total debt as a percentage of gross domestic product (GDP) has doubled in the past 25 years. While the average in 1995 was still above 80%, debt has risen to 160% in 2020.
However, the largest increase in the debt burden occurred in 2021. It even exceeded the 14% increase during the global economic crisis in 2008 and 2009. Government deficits in the G7 countries also exceeded the levels of the 2008 and 2009 crisis.
In the 25-year period before 2020, the average government deficit in the G7 was about 3% of GDP. This has more than tripled to an average of 10% by 2021, ranging from 4% in Germany to 15% in the United States. The resulting inflation is a political poison because it affects the purchasing power of voters. Research partners warn that reining in inflation is not easy. Tighter monetary policy alone is not enough, debts are too high for that. The G-7 countries simply cannot afford interest rates higher than current inflation rates.
And raising taxes is not a very attractive political alternative. Therefore, sustainable inflation may be a very convenient way for politicians to reduce the real value of excessive government debt.
real assets (use)
Therefore, research affiliates suggest that investors adjust their investment portfolios with this inflationary system. In practice, this means reducing positions in the most popular stocks and especially interest rate-sensitive growth stocks and further diversifying the portfolio towards real assets.
Research affiliates refer to investing in real estate, commodities, and stocks of commodity producers, among others. The research firm even suggests taking advantage of low real interest rates to fund purchases of real estate assets – such as real estate – whose prices are rising with rising inflation.
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