, Singapore

What are three effective inflation hedges?

DBS said YoY inflation will stay elevated until May 2022.

The year-on-year inflation will likely stay elevated until May 2022, according to DBS, but there are three effective ways on how investors can hedge against it.

Joanne Goh, a senior investment strategist at DBS, said the resource sector is a good  inflation hedge, given that “prices tend o rise when inflation is rising.”

“Amongst these, we believe gold, metals, and oil should outperform the rest as there are additional catalysts which will continue to support prices,” Goh said.

Gold, in particular, “protects purchasing power even better during periods of hyperinflation,” according to Goh.

Goh said oil is also a good asset to invest in since “oil price will continue to trade higher as under-investment in fossil fuels will lead to higher oil prices down the road.”

Oil demand will also gradually pick up in 2022 with the reopening of global economies.

Europe oil majors, in particular, will generate strong profits and free cash flow in 2022 as it “continues to ride on higher oil prices.”

“In our view, Europe oil majors are undervalued as investors have ignored this sector for environmental, social, and governance (ESG) concerns,” Goh said.

“Although ESG ratings for these companies are low, we expect them to gradually improve over time as they have diversified their business portfolios to incorporate more ESG focus, such as investing in electric vehicle charging stations, grids, and clean energy,” the analyst added.

It will also be good to invest in businesses with higher margins like profitable quality big Tech companies which, according to Goh, “could stay resilient in the current environment.”

“We recommend investors to look for Technology winners through our I.D.E.A. (Innovators, Disruptors, Enablers, and Adapters) framework for picking companies that display a strong historical track record of jumping through multiple financial S-Curves through their years of operation,” Goh advised.

The last effective inflation hedge on DBS’ list is real estate.

In particular, Goh said Singapore real estate investment trusts are good inflation protector.

“Rental and cap rates will be rising in line with inflation and the sector is a strong proxy to the physical property sector. S-REITs continue to pay between 4% to 6% in dividends, and we like them as income generators of our Barbell portfolio,” Goh said.

Historically, Goh said S-REITs have perfomed well amidst a rising rate environment.

“S-REITs should perform with all the respective sub-industries such as retail, office, and hospitality REITs normalising in tandem with the recovering economy,” the analyst said.

Others which can serve as inflation protectors include the Financials sector, and healthcare.

Goh said inflation has a limited imapct on healthcare companies, whilst financial institutions “stand to benefit from rising interest rates due to net margin expansion."

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