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Which Asset Classes Hedge Against Inflation?

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Hedge Against Inflation

Hedge Against Inflation

This infographic is available as a poster.

Which Asset Classes Hedge Against Inflation?

U.S. inflation has climbed 5% over the last year, the largest 12-month increase since August 2008. With this in mind, many investors may be wondering how to position their portfolio to hedge against inflation.

In this Markets in a Minute chart from New York Life Investments, we show which asset classes have beat inflation in recent years.

Real Returns by Asset Class

To see which asset classes have helped hedge against short-term inflation, we calculated annual real returns—returns net of inflation—for various types of investments. A return above zero means that the asset class beat inflation, while a return below zero means that the asset class did not keep up with inflation.

Here are minimum, median, and maximum annual real returns for various asset classes from 2012-2020.

 MinimumMedianMaximum
Global equities-11.615.424.5
U.S. large cap equities-6.314.330.9
Listed infrastructure equities-8.812.323.8
Real estate investment trusts (REITs)-7.37.226.4
Gold-28.86.023.2
U.S. treasury inflation protected securities (TIPS)-10.12.69.6
Foreign bonds-9.61.814.1
Floating rate bonds-0.40.02.2
Global commodities-33.9-2.715.3
Energy equities-38.0-11.536.7

Global equities had the highest median real return in recent years, followed by U.S. large cap equities and listed infrastructure equities.

Gold beat inflation about half the time, though in its worst year (2013) it was almost 30% below inflation. At that time, the U.S. Federal Reserve announced it would end quantitative easing measures, which decreased the perceived need for gold as a hedge.

Global commodities and energy equities had the only negative median real returns of the group. However, energy equities also had the highest maximum return over the last decade, and proved to be the most volatile asset class of the group.

Hedging During High Inflation

Of course, there are some limitations to this data. U.S. annual inflation has been relatively low in recent years, averaging under the Federal Reserve’s 2% target.

Asset classes may respond differently during periods of high inflation. For example, equities have shown their highest real returns when inflation is between 2% to 3%. However, returns may become more volatile when inflation is high, because it can increase costs and reduce earnings.

On the flip side, some asset classes perform better during periods of high inflation. While commodities had a negative median real return in recent years, they performed well during three historical periods of high inflation.

Hedge Against Inflation

When annual inflation averaged about 4.6% from 1988-1991, commodities had a total annualized return of over 20%. Total annualized returns show what an investor would have earned over a given time period if returns were compounded. Gold has had a more mixed track record during high inflation, though it had a whopping annualized return of 35% from 1973-1979.

The ability for an asset class to hedge against inflation can also depend on the timeframe. For example, over the long-term, gold has seen strong inflation-adjusted returns.

Time to Take Action?

U.S. Federal Reserve chair Jerome Powell believes rising U.S. inflation is temporary. Prices decreased sharply at the onset of the pandemic, making year-over-year inflation figures look much larger. He also believes supply bottlenecks are temporary as industries have been caught with soaring demand amid a quick reopening. However, some Fed officials say the economy is in unprecedented territory, and it’s hard to know where inflation will go next.

What can investors do? There is no one asset class that has proven to be a silver bullet against inflation historically. Instead, investors may consider diversifying their portfolio with asset classes such as equities, REITs, commodities, and gold. This may help hedge against inflation, whether it stabilizes around 2% or rises to levels not seen for decades.

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Markets in a Minute

Data Centers: Investing in the Infrastructure of the Future

Infrastructure refers to any asset that provides an essential service. In today’s interconnected world, data centers are exactly that.

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Data Centers

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Data Centers: Investing in the Infrastructure of the Future

Digital transformation is one of the world’s most prominent trends today.

For evidence, consider the growth in internet users worldwide. By 2023, 5.3 billion people (66% of population) will be using the internet, up from 3.9 billion (51% of population) in 2018.

This growth has resulted in an incredible amount of data being produced each day, whether its from streaming music on Spotify or buying goods on Amazon. But how is all this data being processed?

In this Markets in a Minute chart from New York Life Investments, we shed light on the importance of data centers, and why they should be considered as core infrastructure.

The Role of the Data Center

A data center is a facility that stores, processes, and disseminates data. There are thousands of them around the world, and collectively, they’re referred to as the “cloud”.

This puts data centers at the center of nearly everything we do online: e-commerce, communications, storage and back-up, and even online gaming. To gain a better sense of what this all looks like, the following table breaks down the storage capacity of the world’s data centers.

Segment2016 Storage Capacity (exabytes)2021 Storage Capacity (exabytes) 
Compute160470
Collaboration170400
Database & analytics150380
Enterprise resource planning180420
Video streaming50180
Social networking60160
Search engine30100
Other consumer apps70190
Total8702,300

Source: Statista (2021)

One exabyte is equal to one billion gigabytes, which means the world currently has 2.3 trillion gigabytes of total storage.

The largest segment is compute instances, which are cloud-based workstations used by data scientists. At the lower end of the scale are segments like video streaming (includes Netflix and Hulu) and social networking (think Facebook or LinkedIn).

Cloud Spending Reaches a Historic Milestone

For businesses that create and use data, moving to the cloud (as opposed to maintaining their own servers) has plenty of advantages like cost savings, flexibility, and security.

This is driving exponential growth in cloud infrastructure spending, which reached a record $130 billion in 2020. At the same time, spending on data center hardware decreased from $96 to $90 billion. These results are partly attributed to COVID-19, which forced many businesses to switch to a work-from-home operating model.

A survey conducted by 451 Research found that 40% of businesses had increased their usage of cloud services during the pandemic. In addition, 85% of those who were impacted indicated that the move would be a permanent one.

Data Centers are Infrastrcture

The scope of an infrastructure investor has historically been limited to companies in construction, energy, and transportation.

But what defines infrastructure?

It’s any physical system that is vital for an economy’s development and prosperity—and in a world where over 5 billion people are expected to be online by 2023, the data center is the perfect embodiment of that.

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Sustainable Investing Assets Worldwide (2018-2020)

From 2018-2020, global sustainable investing assets grew by 15% to reach $35.3 trillion. Here’s how they break down across five major markets.

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Sustainable Investing

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Sustainable Investing Assets Worldwide (2018-2020)

Sustainable investing is top-of-mind for many investors, but how fast is it actually growing?

Between 2018 and 2020, global sustainable investing assets grew 15% to reach $35.3 trillion. This works out to more than a third of total assets under management.

In this Markets in a Minute from New York Life Investments, we explore the value and growth of sustainable investing assets across five major markets.

What is Sustainable Investing?

Sustainable investing considers environmental, social, and governance (ESG) factors in portfolio selection and management. For the purposes of this data, it is a broad definition that includes seven main approaches:

  • ESG integration
  • Corporate engagement & shareholder action
  • Norms-based screening
  • Negative/exclusionary screening
  • Best-in-class/positive screening
  • Sustainability themed/thematic investing
  • Impact and community investing

In most regions, it is becoming increasingly common to combine several of the above strategies within the same product.

Sustainable Investing Assets by Region

Sustainable investment data comes from five major markets: the U.S., Europe, Japan, Canada, and Australasia. Currencies have been converted to U.S. dollars at the prevailing exchange rate at the day of reporting. We’ve based growth rates on U.S. dollar values.

Here is the value of sustainable investing assets in U.S dollars, sorted by asset amounts in 2020.

Region20182020Growth Rate
United States$12.0T$17.1T42%
Europe$14.1T$12.0T-15%
Japan$2.2T$2.9T32%
Canada$1.7T$2.4T43%
Australasia$734B$906B23%

All 2020 assets are reported as of December 31, 2019 except for Japan which reports as of March 31, 2020. Australasia is Australia and New Zealand. In 2020, Europe includes: Austria, Belgium, Bulgaria, Denmark, France, Germany, Greece, Italy, Spain, Netherlands, Poland, Portugal, Slovenia, Sweden, the UK, Norway, Switzerland, and Liechtenstein.

The U.S. makes up almost half of global sustainable investment assets, and saw the second highest growth rate. One strong theme in the country is racial justice investing. Over 120 investors and organizations signed a call to action for the investment community to dismantle systemic racism and promote racial equity and justice. They plan to achieve this through various actions, such as hiring people of color and financing Black entrepreneurs.

Europe makes up over a third of all sustainable investing assets. The region has seen important regulatory developments, such as:

  • Institutional investors, asset managers, and advisors must report on how they integrate sustainability risks and adverse impacts at the entity level
  • Advisors are required to ask about their clients’ ESG preferences and advise appropriate products

While Europe saw a decline in growth from 2018-2020, this is because the region has changed how they define sustainable investing. Tighter legislation means that some products that previously qualified as sustainable may not meet the new requirements. The goal of the legislation is to create clear standards for sustainable products, promoting trust and easier access for investors.

The Mounting Pressure

Globally, the proportion of sustainable investing assets is growing. In fact, sustainable investments make up 36% of global assets under management, up from 28% in 2016.

Investment professionals say the top drivers of sustainable investing are to help manage investment risks, and because clients demand it. Not only that, the recent Intergovernmental Panel on Climate Change (IPCC) report has reinforced the importance of sustainable investments.

“The climate crisis poses enormous financial risk to investment managers, asset owners and businesses….. The public and private sector must work together to ensure a just and rapid transformation to a net-zero global economy.”
António Guterres, UN Secretary-General

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