14.10.2021

WELLS FARGO: THESE ASSETS WILL PROTECT YOU BEST IN TIMES OF INFLATION

Worried about inflation? There is a reason - especially if you own the wrong assets and bet against the shares of the S&P 500.

And what are the right and wrong assets to own during inflation? The financial institution Wells Fargo provides the answer to this question by examining 15 main asset classes and calculating which are the best and worst in the inflationary periods since 2000.

The findings are instructive.

In summary: Inflation is rising for oil and emerging market stocks. And stocks are generally doing well in times of rising inflation. But investors need to prepare for losses on most types of bonds as inflation accelerates.

This is a good reminder not to automatically press the S&P 500 share button if there is a blast of inflation.

The stock "as a group has generated impressive returns in times of rising inflation, with levels that far outweigh the impact of inflation," said Chao Ma of Wells Fargo's global portfolio and investment strategy group.

The best assets during inflation

If you want to know what to own during inflation, start with one word: Oil.

But Wells Fargo found that the price of oil had jumped more than 40 percent during inflationary periods since 2000. It certainly exceeds 10% profit from the inflationary period of major US stocks such as the S&P 500.

The increase in oil during inflation is more than any other major asset class the bank is considering. Oil profits during inflationary periods were also approximately three times higher than the average increase of 12% in all 15 assets surveyed by Wells Fargo.

Remarkably, investors have already sniffed this out. The US Petroleum Fund (USO), a major ETF that tracks oil prices, has risen 69.2% in 2021 so far. This is also a bigger jump than all other ETFs tracking asset classes analyzed by Wells Fargo.

What, then, is the second highest asset class during inflation? This is not gold - it is in third place (with an increase in the inflation period of 16%). These are stocks in emerging markets that recorded 18% earnings in periods of inflation after 2000, Wells Fargo found.

And if so again, this asset could provide good opportunities for investors in the future. The Vanguard FTSE Emerging Markets ETF (VWO) ETF has risen just 1.8% this year.

In equities, small companies outpace large ones, and growth-oriented stocks perform better than in times of accelerated inflation.

This is a bit counterintuitive, as stocks in the energy sector are usually included in value indices and ETFs. Still, shares of the S&P 500 rose only 8% during inflationary periods. That's almost half of the 12 percent increase in growth-oriented stocks. And stock returns are half the 16% growth of cyclical stocks, which tend to rise and fall along with the strength of the economy.

And if growth is good, small stocks are even better. Small-cap U.S. stocks rose 15 percent during inflationary periods in 2000. Smaller companies are thought to serve niches with harder-to-replace commodities. This gives them some price power. In addition, smaller companies tend to grow faster than larger ones.

The IShares Core S&P Small-Cap ETF (IJR) is flying this year: a 20.4% increase so far.

The bottom line: Be inflation-smart. Don't let the risk of inflation drive you out of the S&P 500. Or the stock as a whole. The headlines are scary, but data from 2000 show that stocks can still make impressive gains amid inflation, write Wells Fargo experts.

And if you are ready to do your homework, you can find opportunities for market superiority, even if prices rise higher.

"We support stocks in the current environment of economic expansion and rising inflation," said Ma of Wells Fargo. "They offer the potential for both long-term price increases and a desired level of income."