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Inflation

Five investment ideas that could outpace inflation in 2022

As inflation in the UK approaches 10%, what moves can investors make to protect their capital? Here are five suggestions.

By

Date

CultX Team - Wine Investment Specialists
06/09/2022

Contents

  1. Inflation: A growing threat to wealth
  2. What are some of the best investments during high inflation?
  3. Can you profit from inflation?
  4. Get started with fine wine investment

Inflation: A growing threat to wealth

The former US president, Ronald Reagan, once described inflation as being “as violent as a mugger, as frightening as an armed robber and as deadly as a hit man”. He was speaking just after taking office in 1980, when inflation in the US would peak at 15%.

While the UK isn’t quite there yet, the rate of inflation has hit a 40-year high of 10.1%. It’s the highest rate in the G7, which some experts believe will remain the case into 2023 and 2024. Energy prices are the biggest contributor to the country’s current inflation rates, but global food prices are also going up. One food industry boss warned the latter could rise by up to 15% this year.

Sadly it’s something few of us have control over. Inflation is calculated using the consumer prices index (CPI) and retail prices index (RPI), which track the increase of price over time. The Bank of England can take corrective measures – raising interest rates to incentivise people from spending. The bank rate currently stands at 1.75%, up from just 0.1% in December 2021, and is reviewed every six weeks.

In a YouGov survey, high-net-worth individuals said they see inflation as the second biggest threat to wealth (25%), second only to market volatility (31%). Tax rises was the third threat at 20%. But is there anything that investors can do to protect their money?

How does inflation affect investment?

The relationship between inflation and equity prices is not straightforward. Inflation is capable of chipping away at the value of interest and dividend payments, and eroding the value of capital. It may also result in some asset classes underperforming.

But the impact of inflation on an investment portfolio really depends on where the money is invested, and the period of time inflation is sustained for.  Some experts argue that those invested for the long term shouldn’t allow short-term economic conditions to change their investment strategy too much beyond small tweaks here and there.

What are some of the best investments during high inflation?

Very high inflation tends to have a negative impact on financial assets such as stocks and bonds. Liquid assets are more vulnerable because they appreciate less over time. Similarly, those investments that pay out a fixed income are less appealing because the dividend will be worth less.

In comparison, research suggests that value stocks (or illiquid assets) are preferred by investors when inflation is high. They can have a higher intrinsic value than their current trading price. These could be tangible assets such as art, wine and antiques, private markets such as venture capital and property, or stocks with international earnings.

Research by Connection Capital has found more than two thirds of high net worth investors now dedicate more than 10% of their portfolios to alternative assets, with 30% planning to increase that percentage.

There is no golden rule. But above all, maintaining a diverse portfolio that includes assets that can perform during periods of high inflation can help investors cushion portfolios against unexpected spikes.

How can investors protect their investments from inflation in 2022?

Can you profit from inflation?

The classic 60/40 portfolio investment strategy can start to lag during periods of high inflation. But those investors that tilt towards commodities and alternative assets, and away from stocks and bonds could see greater returns. While no asset is guaranteed to protect your investment, those real assets such as commodities, infrastructure and luxury items have different price drivers.

“Historically, the wine investment category has been perceived as only for the wealthy, or those with considerable wine knowledge. We know this is not the case. It has become an increasingly popular investment asset among the general public, especially as the low-growth, low-rate yet high-inflation environment has left many investors to seek out alternative investments for better returns and to hedge against inflation.”

He continued, “As a physical ‘passion asset’, the primary drivers of fine wine prices are internal factors, namely limited supply and persistent demand through different macro backdrops. Wine is therefore less susceptible to changes in inflation or policy than many other financial assets”.

Get started with fine wine investment

Empowering people through technology, data and access to a global community, Cult Wines is redefining the fine wine market – making it accessible, secure and rewarding.

Combining Cult Wines heritage with the latest technology, and powered by world-leading data and predictive AI, CultX is the ultimate marketplace for buying, selling, collecting and investing in over £200m of the world’s most prestigious Fine Wines.

If you are looking for the control of a self-managed portfolio with low fees then CultX’s wine investment app is for you. To start investing in wine with CultX, join our waitlist now.

* Past performance is not indicative of future success; the performance was calculated in GBP and will vary in other currencies. Any investment involves risk of partial or full loss of capital.

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