Our three inflation-beating shields

The value of a portfolio's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested. The views expressed in this document should not be taken as a recommendation, advice or forecast. Wherever performance is mentioned, past performance is not a guide to future performance.

Yes, inflation will remain higher for longer. Yes, central banks will likely continue to pursue their hawkish monetary policies. And yes, financial assets are likely to fluctuate in an environment unsettled by numerous external influences – not least war in Ukraine and the ongoing energy crisis in Europe.

But should you really dismiss the share markets? Should you really just hope for better times or the ‘right’ moment?

Applying some core principles

At M&G Investments, we do not think you have to – as long as you apply some core principles: be selective, diversify your portfolio and invest for the long term.

In selecting stocks, we avoid relying on false trends or investing in a sector as a whole, however promising it may seem.

The last earnings season confirmed that performance levels can vary widely from one stock to another, even within the same industry. You need to take a close look at factors such as each firm’s level of debt, the quality of its management and its entire operational environment, which includes energy efficiency and environmental responsibility.

The example of technology

Take technology, for example. Given current valuations, we believe there are opportunities in this area, but you need to be selective.  We are wary of firms that are exposed to weakening demand from end consumers – we prefer companies involved in cloud computing and data centres – areas that are holding up well despite the prevailing market backdrop. Even the energy sector, which might look like a safe investment in today’s context, is not immune to unexpected changes, for example windfall taxes, that may impact the attractiveness of investments.

You need to be selective

At a country level, we are finding opportunities across markets including some compelling ones in  Japan, where corporate reform is driving opportunities, and the monetary policy-driven foreign currency backdrop may be closer to finding a stable ground compared to the recent past. But our approach is bottom up. We are finding idiosyncratic opportunities on a stock by stock basis.

The same is true for the UK. While we are cautious on the macro backdrop in the UK, some of the large cap equities are offering particularly good value and the silver lining is the large revenue exposure to international markets where a weaker sterling boosts revenues when converted back into local currency.

Remain diversified

We don’t think this is an environment for ‘broad strokes investing’. However, this is a market that can offer good returns for active investors. As mentioned though, selectivity is key, as is the need to diversify risk across a portfolio of investments.

M&G’s range of investment strategies include a wide variety of approaches, and a broad range of investment propositions to allow our clients to stay diversified. Some of our management teams adopt value approaches, others manage growth strategies and others style agnostic strategies. We also have strategies designed to deliver a financial return alongside a real world environmental and /or social outcome.

Focus on the long term

Last, and importantly, we avoid investing in  hypes. We favour companies with strong and resilient fundamentals and long-term themes: those we believe will be able to thrive independent of market turbulence. That includes renewables in the broadest sense. So also including suppliers as well as firms that use low-carbon technologies to improve their energy efficiency. Another key area is infrastructure, where many company revenue streams are linked to the rate of inflation, and also offer shareholders higher and growing dividends, which can help protect investors from the rising costs of capital.

While we can’t predict where the next crisis could come from, nor when it will come, what we can say is that the three-pronged approach of selectivity, diversification and long-term focus, should help clients navigate the market volatility and will create portfolios with good return potential.