By David Thomson

After many years of low inflation, a bounce back in the global economy, despite still being constrained by Covid induced bottlenecks, is creating levels of inflation not seen for decades.

The recent events in Ukraine have only served to send energy and other commodity prices higher, which will add to inflationary pressures. While such pressures are expected to be

short-lived, workers are likely to press for higher wages to maintain their standard of living, which might result in a spiral of inflation that central banks are keen to avoid.

This is a situation many investors will not have experienced and markets have fallen sharply so far this year both in response to rising prices and the hostilities in Ukraine.

There have been very few safe havens. Rising interest rates have a negative impact on companies whose borrowing costs rise and their income may also drop if consumers are feeling the pinch and buying less. In addition, profits will fall if companies are unable to pass on the increases in their costs. Likewise, fixed interest investments also fall in value as the return they provide becomes less attractive compared to cash, while the capital value erodes in real terms because, unlike equities, there is no prospect of growth.

Most affected by inflation have been some of the areas of the market that have performed well in recent years which were characterised by

low levels of inflation and low interest rates. Accordingly, we have seen profit-taking in companies that have been growing, particularly those that were using external finance to fund their expansion, such as technology stocks and smaller companies.

With interest rates rising, cash becomes a more attractive investment. However, after inflation is taken into consideration the return is still negative.

Commodities have performed well as inflation has risen and they may continue to perform well if economic growth remains fairly robust because there has been lower levels of investment in these areas in recent years and it takes a long time to bring a new mine or oil-well online.

Index-linked investments also benefit at

times of rising inflation and, if they are backed

by government, they provide a strong level of protection against the ravages of inflation.

As such, government-backed fixed-interest investments have always tended to look

relatively expensive when compared with other interest bearing investments but have clear attractions in a rising interest rate environment.

Property as an asset class has also held up well because inflation pushes up property values that may also be experiencing increasing demand as the global economy recovers. However, investors have to be careful how they gain exposure to property as, by its nature, it can be illiquid and not always easy to invest or disinvest when you want to. It also tends to be a relatively high cost investment compared with other asset classes.

Gold has traditionally been seen as a safe haven against inflation but the yellow metal can be unpredictable and in recent years appeared to be losing out to cryptocurrency as the speculator’s weapon of choice. In the short term at least, gold has performed well, helped not only by rising inflation but also the Ukrainian conflict because it is seen as a safe haven in times of crisis.

Whether investors should reposition their portfolio in response to inflation will depend on how long and how elevated we believe inflation will be. The market may have already priced in the inflationary threat and while there has been

a strong bounce in the economy from the

Covid-induced lows it is hard to see that being sustained as government support is replaced with rising taxes and rising interest rates.

However, markets recover from such setbacks and inflation should not normally concern

longer term investors.

David Thomson is chief investment officer of VMW Wealth.