Inflation is here to Stay
Most European Union (EU) residents are forced to work extra hard for their money in this tough, demanding and highly competitive business climate. Today’s troubled EU region has made it more important than ever for them to protect those hard-earned euros they’ve been able to save and invest for the future. Whether their retirement nest egg is a thousand euro’s or a hundred thousand or more, it has never been more important for them to protect their funds from various economic uncertainties such as higher taxes and lower wages but now a new problem inflation has become a major pothole that line their road to financial security.
Figure 1: Inflation Rising in the EU
Within the EU region, the UK has the highest inflation rate among the world’s top economies, in the latest sign the Brexit vote is contributing to a squeeze on living standards. The increased cost of importing food and fuel is pushing prices to rise at a faster rate than anywhere in the G7 group of leading global economies. The UK ranked top for inflation at a staggering 2.9% among the G7, whose other members include the US, Canada, France, Germany, Italy and Japan. The rise in prices in the UK was also above the averages for the euro area, the wider European Union and the G20 nations as a whole (refer Figure 1).
Amidst the sky-high inflation rates plaguing various parts of the world, in particular the UK has threatened to eat away at the safety net provided by the money that most of its residents had struggled to put aside for their future. Here is a step that most Europeans can now take to protect their money from the uncertainties posed by today’s volatile economy, namely the threat of inflation spiraling out of control.
 The Organization for Economic Co-operation and Development (OECD), 2017
 Eurostat, 2017
Diversifying your portfolio will help to lower your risk and increase your returns. One of the asset classes that we use to build diversified portfolios consist of hard-asset stocks. These hard-asset investments include companies that own and produce an underlying natural resources include oil, natural gas, precious metals (particularly gold and silver), base metal such as copper and nickel and other resources such as diamonds, coal, lumber and even new asset class such as shipping containers. Today, investment analysts recommend broadly diversifying your hard-asset stocks by resource type, geographic location of company’s reserves and even to new tangible asset classes.
Keep in mind that investing in hard-asset stocks is not the same thing as investing directly in commodities. Buying gold bullion or a gold futures contract is an investment directly in raw commodities or their volatility. Whereas, buying a physical gold mining company is a hard-asset stock investment.
Figure 2: Sterling Losing its Value
Over time, the pound sterling loses itsr buying power and the goods and services they import will cost more (refer Figure 2). Commodities, as an asset class, generally maintain their buying power in their respective currency terms. Stocks, as an asset class, generally appreciate over inflation after dividends are factored in. And, recently, hard-asset stocks have been appreciating nicely.
Preserve Your Capital
Jeremy Siegel, author of the book “Stocks for the Long Run,” did an analysis of investments over the past 200 years. Gold on average, maintains its value over time. For example, if you bought a dollar’s worth of gold 200 years ago, after adjusting for inflation, it would be worth $1.07 today. Because of inflation, a dollar today has only the buying power of about 7 cents back then. However, the stock market on average has been appreciating about 6.5% over the long-term of inflation. Hard-asset stocks give you the best of both worlds: the stability of a real asset, plus higher market returns.
One index that tracks hard assets is the Goldman Sachs and FTSE Natural Resources Index. This index is compromised of 70% energy and 11 % minerals. As the end of December 2017, this index is up 9.4% year-to-date. Its three year annualized return is 29% and its five-year annualized return is 19.7%.
 The Economist, March 2018
 World Economic Forum, 2017
Figure 3: Hard Assets Prices Spike during Inflation
Financial analyst segment hard-asset stocks into their own asset class because they have a unique set of characteristics.
First, the movement of hard-asset stocks such as gold increases with inflation (refer Figure 3) and is generally less correlated with the movement of other asset classes such as bonds. Second, hard assets have a unique (and positive) reaction to inflationary pressures. And third, there are periods in the longer-term economic cycle when including hard assets helps boost returns.
Another appealing aspect of hard asset stocks is that when they are negatively correlated to bonds and other inflation-sensitive economic sectors, they provide a unique opportunity for diversification. Adding hard assets to your investments is not as simple as just increasing or decreasing their portfolio allocation to create a more aggressive or conservative mix. When you are increasing bonds and decreasing stocks to make a portfolio more conservative, it helps to add hard asset to counter the bond risks.
With inflation becoming a major threat to European investors today, especially those living off of a fixed income, rising prices have become a “wealth destroyer”. Rising prices due to inflationary pressure eat into the returns of all major of financial assets including hard cash. If the ECB hikes interest rates this year, bonds will get hit further while stocks will suffer continuous decline.
The probable only negative economic impact would be that the cost of loans in the EU region will increase resulting in many companies unable to pass along this additional cost. Thus their profits are further squeezed and their stock prices spiral further down. This might be soon be followed by real estate prices within the EU falling as demand starts to dwindle due to increased cost of mortgages. Thus, the only remaining “silver-lining” for investors to maximize returns during this inflationary period is to make shift towards hard assets!
 Hard Asset Investing: Bloomberg
 The Economist, January 2018
Figure 4: Hard Assets Negatively Correlated with Inflation
To conclude, one of the lessons from the Dow Jones stock market collapse last month in the US and high inflation in the EU is that it’s always wise to add hard assets into your portfolio. Remember, that tangible assets typically have low correlations with more traditional financial assets (refer Figure 4). This means that their values usually don’t move in tandem with stocks and bonds, hence reduces the volatility of your portfolio.
Take for example hard assets, such as timber, land, precious metals and even shipping containers. All these hard-assets tend to have low correlations with both stocks and fixed-income securities. Thus, hard assets will gain value when stocks and bonds hold steady or decrease in value, and vice versa.
Finally, as risk-adverse investor, some physical asset investments are well suited to conservative or moderate investors, while others are more appropriate for investors who can tolerate a fair amount of risk. It’s important to understand the unique characteristics of the investment you’re considering and how that investment fits in with your overall allocation strategy.