As inflation heads north, investors look for havens. Could consumer staples offer one?

Rising commodity prices are continuing to fuel inflation, which has led to a 4.2% rise in US consumer prices in the year to April, the highest in any year since 2008.

None of this is good news for family offices which tend to pay more for goods and services than the average Joe, as Family Capital warned on 12 January. And the going will probably get tougher. 

European carbon futures are trading near their all-time high of 54 euros a tonne, following a 64% rise over the last year. The price of copper is up 34% year to date. Iron ore has risen 38%. Lumber has risen 57% and tripled in a year.  Crude oil is up 40% following an oil supply outage in the US which has lifted petrol prices to a six-year high. Broadly-based agricultural ETFs are up 20%.

Jim Leaviss, chief investment officer for public sector bonds at M&G, has warned investors could face a nightmare scenario of rising inflation and bond issuance by a US government keen on stimulus

A rise in manufacturing costs is spreading out of China, where April’s producer prices rose 6.6%, the highest since 2017. China has become an exporter of inflation, even as President Biden stokes up consumer demand by stimulating the US economy.

Supply chain costs are increasing. In the year to date, container rates have risen 34% from an elevated level. A microchip shortage is hitting technology and car prices. There are signs of consumers spending more because they are worried about higher prices. 

Jim Leaviss, chief investment officer for public sector bonds at M&G, has warned investors could face a nightmare scenario of rising inflation and bond issuance by a US government keen on stimulus. 

Investors are starting to bet that recent events could kill price stability and the demand for bonds. For the first time in thirty years, this might come to pass.

The Federal Reserve has promoted the idea that any rise in inflation will be temporary. But Jeffrey Gundlach, chief investment officer at Double Line Capital, says this is just a guess – he thinks inflation could be pervasive.

The weight of speculative money is tending to exaggerate the price trends, as banks and hedge funds hire more personnel to chase trends aggressively.

How to hedge?

Traders see carbon as an interesting trade because the European Union is taking steps to cut emissions by 55%. It is not proposing to put a cap on prices, saying they will make polluters pay, as the economy recovers.

Banks are continuing to chase the sector. Hedge fund manager Pierre Andurand has been bullish on carbon futures saying they could rise to 100 euros. 

“There’s a basket of bullish factors that is really why we see prices up at these levels,” according to Refinitiv analyst Ingvild Sorhus.

Commodities could rise higher, although they have paused for breath in the last few days. After all, if their price rises too far, it will choke off the manufacturing revival. 

Worries about inflation, and conflict in the Middle East, means gold is up 5% in a month although it has fallen 7% so far this year. 

Billionaire investor Sam Zell is a bull, arguing that we could be heading for inflation like the 1970s. 

But gold will be punished if or when the Federal Reserve finally hikes. The same is true for bitcoin, an alternative store of value, which has been trending down after Elon Musk’s decision not to use it for car payments.

Bitcoin is still holding on to a gain of 90% this year and ethereum can boast 465%.  Which is probably enough for now. 

Inflation-linked bonds have a place in today’s diversified portfolio. Technology exposures need to be high quality. Venture capital has lost a little of its edge.

A more interesting diversification opportunity lurks in consumer staples, which are best placed to pass on price rises to their customers.

Consumers are cashed up after Covid, and look likely to bring their purchases forward if they start getting concerned by price rises. 

Residential real estate is particularly interesting following a 16.1% leap in US house prices in the first quarter, according to the National Association of Realtors.