deVere Investor Insight - Q1 2021

38 Investor Insight // Q1 - 2021 Which parts of a multi-asset portfolio are most vulnerable? So, if inflation is going to be modest, what part of an investor’s multi- asset portfolio might it affect most? Within the fixed income part of a portfolio, long-dated government bond markets are most vulnerable to inflation. This is because of the length of time that investors must wait to get their coupons paid and the capital returned. Short-dated bonds and cash are preferable. But do not jettison government bonds from a portfolio. They have a valuable role in a portfolio, as a cushion for periods of stock market instability, since during periods of crisis on capital markets their relative safety is an attractive feature. Most active fund managers will have a full suite of fixed income options, enabling them to shorten their duration exposure in government bonds (since bonds that mature soon are less exposed to inflation and interest rate risk), and to buy into higher risk debt. Indeed, during periods of economic growth corporate debt and emerging market government are often attractive as default risk reduces and we see credit agencies giving improved ratings on the debt. Stock markets are generally resilient to modest levels of inflation. Companies can raise prices as input costs rise, and so keep their profitability intact.

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