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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

The Projected Growth of Alternative Assets

Alternative assets — assets beyond stocks and bonds — are projected to grow by 62% from 2020-2025. Here’s which ones may grow the fastest.

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Alternative Assets

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The Projected Growth of Alternative Assets

When it comes to investing, the focus is typically on stocks and bonds. However, in recent years, many investors have turned their attention to another opportunity: alternative assets.

In fact, global assets under management (AUM) in alternatives are projected to grow by 62% from 2020-2025. In this Markets in a Minute from New York Life Investments, we explain what alternative assets are and which categories will see the most growth.

What are Alternative Assets?

Alternative assets are investments that fall outside of the traditional asset classes of stocks, bonds, and cash. They are broken up into the following asset classes:

  • Private equity: Investing in companies that are not publicly traded or listed on a stock exchange. This can also include the acquisition of public companies by a private investment fund or investor.
  • Private debt: Investing in companies in the form of debt as opposed to equity. Private debt is not typically financed by banks, nor traded or issued in an open market.
  • Hedge funds: Largely unregulated funds that can invest across a wide range of asset classes and instruments. These funds aim to ‘hedge’ risk and maximize profits regardless of which direction the market moves through long (buy) or short (sell) positions.
  • Real estate: The acquisition, financing, and ownership of real estate assets by private investment vehicles, funds, or firms. This includes residential, commercial, and industrial properties both at the time of original listing and when being sold between two parties afterwards.
  • Infrastructure: Investment in services and facilities considered essential to the economic development of a society. This includes energy, logistics, telecoms, transportation, utilities, and waste management.
  • Natural resources: Investment in the development, enhancement, or production of various types of natural resources. This includes agriculture, renewable energy, timberland, water, and metals.

In contrast to traditional markets, alternative assets are typically less liquid and less regulated.

Global Growth

According to Preqin, all alternative asset classes will see significant growth in global AUM. Here’s how the projections break down from 2020 to 2025:

 20202021P2022P2023P2024P2025PCAGR
Private equity4.4T$5.1T$5.9T$6.8T$7.9T$9.1T15.6%
Private debt$848B$945B$1.1T$1.2T$1.3T$1.5T11.4%
Hedge funds$3.6T$3.7T$3.8T$4.0T$4.1T$4.3T3.6%
Real estate$1.0T$1.1T$1.1T$1.2T$1.2T$1.2T3.4%
Infrastructure$639B$668B$697B$729B$761B$795B4.5%
Natural resources$211B$222B$233B$245B$258B$271B5.1%
Total$10.7T$11.7T$12.9T$14.1T$15.5T$17.2T9.8%

Private equity will grow the fastest, and will also see the highest growth in dollar terms. In fact, its proportion of alternative assets’ AUM is expected to rise from 41% in 2020 to 53% in 2025. Preqin predicts that this will be due to both strong performance and asset flows, with 79% of surveyed investors planning to increase their allocation to private equity.

Private debt is also expected to see strong growth. With greater risk appetite than banks, private debt funds could be active in emerging technologies such as pharmaceuticals and the remote working industry. These funds take on higher risk in anticipation of higher yield potential, an attractive proposition for investors amid low interest rates in many areas.

Similarly, investors will likely turn to real estate for its yield potential. Long-leased assets usually offer stable cash flows and indexed rents, making them one of the asset classes that may hedge inflation. However, the industry is projected to have the lowest compound annual growth rate, given the uncertainty facing office and retail spaces post COVID-19.

The Opportunities in Alternative Assets

Outside of investments such as liquid alternatives, alternative assets have typically only been accessible to institutional investors. However, recent regulatory changes by the U.S. Security and Exchange Commission (SEC) mean that private markets are opening up to individual investors if they meet certain criteria.

Alternative assets offer a number of compelling opportunities, including portfolio diversification, lower correlation with public markets, and potential outperformance. In fact, research has found that private equity was the best-performing asset class in a public pension portfolio, based on median annualized returns from 2010-2020.

According to Preqin’s projections, it appears investors are realizing this potential. While stocks and bonds will likely remain central to portfolios, alternative assets can help to broaden investors’ horizons.

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Markets in a Minute

The Recovering Financial Health of Americans

The economic recovery has not been even. We show the increase in Americans’ financial health by race, income, gender, and location.

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Financial Health

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The Recovering Financial Health of Americans

Did you spend less and save more due to the COVID-19 pandemic? If so, you’re not alone.

Overall, the percent of Americans with strong financial health increased by 2% from 2020-2021. This was largely due to the aforementioned behavioral changes, along with government interventions like stimulus payments that helped Americans pay off their debt.

However, the economic recovery has not been even for everyone. This Markets in a Minute from New York Life Investments looks at which Americans have seen the biggest increase in their financial health, broken down by race, household income, gender, and location.

What is Financial Health?

Before we dive into the results, let’s take a look at what financial health means. It is measured using eight indicators within four broad categories:

  • Spend: Spend less than income and pay bills on time
  • Save: Have sufficient liquid savings and long-term savings
  • Borrow: Have manageable debt and a prime credit score
  • Plan: Have appropriate insurance and plan ahead financially

People are considered to be financially healthy when they have strong scores across all of the above indicators.

Changes in Financial Health

In order to measure financial health, the Financial Health Network surveyed 6,403 respondents in April and May 2021. Below are the changes in financially healthy people, measured in percentage points (p.p.), from 2020-2021. Statistically significant responses, where the authors are 95% confident that the observed results are real and not an error caused by randomness, are marked with an asterisk.

GroupChange in Financially Healthy People (2020-2021)
Overall2 p.p*
Black9 p.p.*
Latinx4 p.p.*
Asian American11 p.p.*
White0 p.p.
< $30,000 Household income2 p.p.*
$30,000 - $59,999 Household income2 p.p.
$60,000 - $99,999 Household income2 p.p.
> $100,000 Household income1 p.p.
Men4 p.p.*
Women1 p.p.
Northeast2 p.p.
Midwest3 p.p.
South5 p.p.*
West-1 p.p.

With an 11 percentage point jump, Asian Americans saw the biggest increase and are now the most financially healthy of any race. The increase was due to an absence in major employment disruptions, growth in employment, and generous unemployment benefits for those who did experience disruptions.

In addition, the proportion of Black people considered financially healthy nearly doubled due to two primary factors: receipt of stimulus payments and reduced spending. This helped Black families to build up savings, pay bills on time, and improve their credit scores.

While men experienced an increase in financial health, women were disproportionately affected by employment disruptions and childcare responsibilities. For instance, women were more than twice as likely as men not to work due to childcare responsibilities in 2021. Meanwhile, men reported bigger improvements in their liquid and long-term savings than women.

People with a household income under $30,000 saw slight improvements in their financial health, primarily due to unemployment benefits and reduced spending. However, lower-income households saw a significant reduction in the “planning ahead financially” indicator, signifying this could be a temporary improvement.

A Current Snapshot

While it is primarily marginalized groups that saw the biggest improvements over the last year, large gaps in financial health remain. Here is the current percentage of people who are financially healthy for each group.

Financial Health

The starkest differences are by income level. People with a household income under $30,000 are nearly five times less likely to be financially healthy than those who have a household income over $100,000.

However, gaps occur across race, gender, and location as well:

  • The proportion of Black and Latinx people who are financially healthy is significantly lower than that of Asian Americans and White people.
  • Despite an increase in female breadwinners in recent years, women are much less likely than men to have strong financial health.
  • Of all regions, Americans living in the South are the least likely to be financially healthy.

At an aggregate level, only one-third of Americans are considered to be financially healthy.

A Continued Recovery?

While it appears that government relief efforts have helped traditionally marginalized groups, it remains unclear what will happen now that these programs are winding down. Not only that, large gaps in financial health still exist. The Financial Health Network recommends policies tailored to help close these gaps, such as universal child care and policies that reduce the disparities in educational opportunity.

Of course, government programs, macroeconomic conditions, and individual behaviors will all play a role in Americans’ financial health going forward. If you were fortunate enough to spend less during the pandemic, do you plan to continue saving more? Your actions could help you build a solid foundation to manage expenses, while also planning ahead for long-term needs.

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