As inflation continues to be remain stubbornly high, we spoke to three family offices to hear how they’re positioning to counter the threat.
By Jill Wong
Asian family offices are hedging against soaring inflation by adjusting their portfolio allocations to increase exposure to dividend stocks, high yield bonds, real estate and alternative investments.
US inflation jumped to a 30-year high of 6.2% in October, data showed this week, while Chinese factory gate inflation reached a 26-year high as supply chain issues and Covid restrictions continue to bite.
The Federal Reserve is expected to start upping interest rates early next year, as conviction in its belief that inflation is ‘transitory’ weakens. The American central bank is set to start tapering its $120bn a month bond buying programme next month as it begins the path to normalisation.
The direction of travel for both inflation and rates remains a key challenge for wealth managers to navigate heading into 2022. A recent study by Goldman Sachs quizzing 150 family office found that two thirds of the respondents are focusing on how to position for a prolonged low-rate environment and the same number are wary of inflation.
Inflation outlook
John Chu, executive director and investment specialist at Carret Private Capital, said he exepcts US inflation to be around 2-3% in 2022, while Youssry Henien, chairman of Windsor Family Office, anticipates a decrease to around 2.3% through 2024.
Munish Randev, CEO of Mumbai-based Cervin Family Office, expects inflation to ‘harden in India’ in the first quarter of 2022 due to a spurt in economic demand as the country reopens after the vaccination program. He also foresees supply issues in some commodities and key raw materials.
Pent-up demand has already resulted in one of the largest e-commerce sales in India during the current festival season, Randev said.
‘India’s core inflation is still around 6% which is on the higher side. The hardening fuel & global commodity prices will also impact many household budgets,’ he said.
‘Also, the base effect benefit will vanish soon. We expect the inflationary pressures to persist in 2022 with some flattening in 2023. Much will depend upon how the Indian economy shapes up or recovers as we go into the new year since the Indian economy is primarily consumption based.’
Diversification
To combat inflation, Chu is favouring quality, high dividend, high yield bonds.
Henien said he will allocate to growth stocks, equity funds, bond funds, ETFs, dividend stocks and real estate with a focus on commercial segments.
Randev said most Indian family offices have anywhere between 30% to 80% in fixed income allocations and the emergence of negative real rates has significantly impacted their total portfolio returns.
Ample liquidity had already pushed down both the short and long end of the yield curve, and Cervin Family Office is positioned in the medium-term using rate-insensitive product structures and alternate products with attractive locked-in yields, he added.
‘Along with a heightened inflationary expectation, we might also see more upwards pressures on yields due to exits by large offshore investors if the tapering gets momentum in the US,’ he said.
‘This scenario necessitates staying away from duration and gradually increasing exposure to credit, including structured debt funds, revenue-based financing products, and venture debt.’