Risks and rewards of facing change

Apr 28, 2022
  • Gargi Pal Chaudhuri

With the world confronting inflection points in globalization, monetary policy, and energy production, financial advisors have been challenged to consider how the risks and rewards of the changing investment landscape impact their clients’ portfolio positioning. We present three central themes to help navigate this environment.

Three themes to position for the risks and rewards in the face of change:

1. Inflation: Let me count the ways – Not yet recovered from pandemic-related logistical disruptions, supply chains are further threatened by geopolitical events. Add to that a supply and demand mismatch in labor markets and the changing calculus of commodities and consumers and nations face the highest inflation in 40 years. Even with the Fed hiking benchmark interest rates and outlining an aggressive path of tightening, we expect this largely supply-driven inflation to remain above pre-pandemic levels for years to come.

Investment solution to consider: Hedge against inflation with equities with exposure to robotics and innovative technologies. Also consider a diversified pool of commodities across energy, agriculture, and precious metals.

2. Inflection point for interest rates – Despite the Fed’s hawkish pivot signaling a waning tolerance for inflation and the yield curve poised to invert, we don’t see this as a harbinger of recession or a sell signal for equities. While yield inversions are often followed by recessions, the timing can be difficult to predict. And perhaps more importantly, equity markets tend to remain resilient for the first twelve months following an inversion, and in most cases have delivered positive returns.

Investment solution to consider: Position portfolios for rising rates with short-dated fixed income and by targeting financial sectors such as banks as well as sub-sectors that have exhibited superior pricing power such as semiconductors.

3. Renewed interest in renewables – While oil and gas prices continue to soar, potentially accelerating the shift to clean energy, strong performance in fossil fuels also presents tactical opportunities in traditional producers. High costs of energy now will translate to healthy profits for traditional energy companies in the quarters ahead, making them an attractive tactical opportunity for some investors. However, we don’t see this disrupting the long-term transition to net zero even as different geographies advance along the path at different speeds.

Investment solution to consider: Invest in the decarbonization journey by targeting clean energy stocks and companies aligned with the objectives of the Paris Agreement.

Learn more about the central themes to this challenging and persistently changing investment landscape and how ETFs can be used to position portfolios for both the risks and rewards associate with it.