Commodity prices hit a new record. What implications of rising commodity prices on global economies? What strategies should investors be to protect their capital? These are the questions posed by Polina Kurdyavko, Head of Emerging Markets, Senior Portfolio Manager of BlueBay.
The BlueBay view
According to the analyst, probably around the world, social risks will increase and there will be both higher inflation and greater pressure on fiscal deficits through subsidies. Against this backdrop, global central banks are quite limited in terms of providing additional accommodative policies. Core rates are likely to continue to rise in light of further inflationary pressures.
Looking at emerging market economies, the BlueBay expert points out that in the first place, 70% of emerging countries are exporters of commodities. Rising commodity prices are likely to give a significant boost to the current account surpluses of a number of countries in these markets. At the macro-area level, the Middle East and Latin America – which represent the majority of the asset class – are likely to be the main beneficiaries.
How investors can protect their capital
Furthermore, Kurdyavko points out, in a world of low growth and double-digit inflation, liquidity is creating a hole in investors’ pockets. How to protect your capitalAnd? Real assets and high-income instruments are the answer. Within hard currency emerging market debt, high yield bonds offer double-digit yields with a relatively low duration. This is a good alternative to offset 7% -10% inflation, as long as default rates stay below double digits, which is what we expect. We also believe that the tail winds of high commodity prices and higher rates will provide support for emerging market currencies and local inflation-linked assets.
In times of high inflation and low growth, we are likely to have to make tough decisions. Often, in times like these, it is a matter of choosing the “least worst” option. Fortunately, investors have more alternatives when it comes to protecting their capital, concludes the expert.