Historically, the equities and real estate investments have generated inflation beating returns for the long-term investors. The stock investor may get additional income in the form of dividends while the real estate can provide rental income to the investor. However, the digital assets such as Bitcoin are also projected as inflation hedge. In this article, we analyze whether equities and digital assets have been a perfect hedge against the inflation or not?
A hedge is an investment that is made to reduce the portfolio risk of adverse price movements in an asset. Headline U.S. inflation figures hit a 40 year high last month, exceeding the market expectations. US Bureau of Labor Statistics data showed that the Consumer Price Index climbed 9.1% during the year through June before seasonal adjustment.
Rising interest rates and sticky inflation
During the recent months, both stocks and digital assets have failed to perform like a perfect hedge against the high inflation for the investors. Going forward, the headline global inflation is expected to be stubbornly high due to fractured supply chains and high commodity prices. The World Bank has recently reduced the global economic growth forecasts for the year 2022 to 2.9% amidst rising stagflation fears.
The risk-on assets like stocks and cryptocurrencies have seen sharp price corrections while the interest-bearing securities have seen renewed interest from the investors and traders. The US Fed has been forced to increase the interest rates by 150 basis points since Mar 2022 due to sticky inflation numbers which have been further exacerbated by the global geo-political reasons.
The major central banks including the US Fed are expected to go for further rate hikes throughout the year 2022, which might negatively impact investor appetite for risk-on assets while pushing more portfolio allocation to safe-haven assets like US Dollar and interest-bearing treasuries.
Equities and Digital Assets as a hedge
In the post Covid era, equities, futures and digital assets prices have traded in co-relation with other growth assets. Despite great returns for long-term investors; the equities have failed to perform like a perfect hedge against the high inflation for the short-term investors, and traders during recent months. The prices of major digital assets have seen substantially lower levels after correcting more than 70% from recent highs.
The volatility in the financial markets and major price corrections have negatively impacted the liquidity for all players in the ecosystem. The potential liquidity tightening cycle might further slow down the recovery process for digital assets prices since ample global liquidity was a major reason for appreciation in digital assets prices over the last two years.
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Disclaimer: All investments are subject to market risk. The statements made in this article are for educational purposes only and should not be considered financial advice or an investment recommendation.
