Portfolio optimisation at the upcoming inflation time.

Updated: Feb 1



Goldman predicts the Fed will raise rates four times this year with the expected first hike in March [1]. The estimate comes amid rising inflation and a tightening job market. “A 10-year Treasury yield rising toward 2.25% makes sense with the Fed indicating that it will make a fast start to tightening this year,” said Jason Bloom, head of fixed income and alternatives ETF strategies at Invesco. Such forecasts have underpinned buying of 10- and 30-year Treasuries after 10-year Treasury note recent month yields nearly 30 basic points up to 1.77%.

With such tendency, the stocks may fall between 20-30% as the market would adjust the price effect on growth stocks' future earnings as well as with the inflation the future earning became less valuable.

Portfolio strategies in the time of turbulence and inflation.

Hedge against a known risk; diversify against an unknown risk.”
  1. Diversification in stocks (f.e. ETFs), in categories in order to lower volatility.

  2. Careful selection of sectors. Those in demand and shortage (f.e. semiconductors), value stocks (f.e. energy), cyclical stocks, so look at those sectors which do well during the inflation. Recently launched "PPI ETF has risen nearly 4% this week. By comparison, the S&P 500 has fallen more than 1%.", states CNBC. PPI ETFs is a mix of historically inflation-sensitive stocks and ETFs, including commodities, TIPS, cyclical stocks such as industrials, materials, banks, home builders. It covers 4 main sectors: industrials, energy, materials and banks

  3. Diversification by countries ( f.e. Emerging Market ETFs for specific sectors).

  4. Diversification in assets classes. F.e. 60% bond/ 40% equities doesn't really work this time. Or even better performing - "the weather portfolio" by Ray Dalio,Co-Chief Investment Officer & Chairman of Bridgewater Associates, which is a global macro investment firm and is the world’s largest hedge fund. This strategy is dedicated to the periods of inflations. As for 2022 forecast Ray Dalio "expect that most likely 2022 will be one of those transition years that come after the big stimulations and before the big tightenings and recessions—e.g., more like 2010-11 than 2008, or more like 2002-03 than 2000."

  5. Exposure to option. As an example, Nationwide Nasdaq-100 Risk-Managed Income ETF (NUSI) is seeking the current income with downside protection. It is structured to provide income in this low-yield environment without using Fixed Income assets that would be hurt when interest rates start to return to levels considered "normal".Long-term bonds typically fall when interest rates increased. BND, Vanguard Total Bond Market fell 5% in 2021. NUSI' strategy is also designed to provide NASDAQ 100 exposure with less risk. The strategy used to accomplish both goals is their Protective Collar Options strategy.

NUSI https://nationwidefunds.onlineprospectus.net/nationwidefunds/NUSI/index.php