Inflation remains stubborn! Analysts believe these investment targets are the most resilient
The latest data from the United States shows that inflation has not yet eased, and investors need to reassess inflation-resistant stocks and bonds. The year-on-year core personal consumption expenditure price index for July was 2.9%, higher than the Federal Reserve's target of 2%. Although the market expects the Federal Reserve to lower the benchmark interest rate, a rate cut may push inflation higher. Research from Hartford Funds indicates that energy and real estate investment trusts perform best during inflationary cycles. The current yield on 10-year U.S. Treasury bonds is approximately 4.2%, up from 1.5% at the beginning of 2022
The latest data from the United States indicates that inflation has not yet fully eased, prompting investors to reassess which stocks and bonds may be more resilient during a period of rising prices.
The Federal Reserve's preferred inflation gauge, the core Personal Consumption Expenditures (PCE) price index, recorded a year-on-year increase of 2.9% in July, in line with market expectations but still above the Fed's long-term target of 2%. Nevertheless, the market widely anticipates that the Fed will lower the benchmark interest rate after the September meeting to address the slowdown in the job market and pressure from the political sphere. However, rate cuts themselves carry the risk of pushing inflation higher.
In the long term, broad market investments (such as index funds) typically exhibit good inflation resistance, as companies will ultimately pass cost pressures onto consumers, and profit levels will adjust accordingly. However, in the short term, inflation can cause significant disruptions. According to a study by Hartford Funds, energy and certain Real Estate Investment Trusts (REITs) tend to perform best during inflationary cycles.
According to Hartford researcher Duncan Lamont, "The revenues of energy stocks are inherently linked to energy prices, and energy is a significant component of the inflation index, so energy stocks often perform strongly during periods of rising inflation. Equity REITs may also mitigate the impact of inflation." Currently, both the energy and real estate sectors offer high dividend yields; for example, the Alerian MLP ETF, with a scale of $11 billion, has a yield of 7.8%, while the Vanguard Real Estate ETF, with a scale of $64 billion, has an annualized dividend rate of 3.9%.
On the bond side, inflation often erodes the purchasing power of fixed coupon payments, but the current environment is better than the high inflation period of 2022. The yield on 10-year U.S. Treasuries is currently about 4.2%, significantly higher than the 1.5% at the beginning of 2022, indicating that bonds can provide more income. At the same time, the Fed is discussing rate cuts rather than hikes, which helps boost bond prices. For investors concerned about inflation, Treasury Inflation-Protected Securities (TIPS) are also an option. The current real yield on 10-year TIPS is 1.8%, implying that the market expects an average inflation rate of about 2.4% over the next ten years. If actual inflation is higher, TIPS investors will benefit.
Additionally, high-yield bonds ("junk bonds") also offer relatively high coupon payments. The iShares iBoxx USD High Yield Corporate Bond ETF has a yield of 5.8%, compared to 4.4% for investment-grade bond ETFs. However, high-yield bonds carry higher risks and are extremely sensitive to the economic environment. If inflation drags down the overall economy, high-yield bond investors may suffer losses. Currently, the spread on junk bonds has fallen to levels not seen since before the 2007-2008 financial crisis, indicating that the risk-return profile for investors is not ideal
