Inflation’s Ongoing Impact and Investment Strategies
Bank of America highlights that persistent inflation is still affecting the economy. Investors, however, can take steps to protect their portfolios against the adverse effects of rising prices. Recent data indicates that inflation is far from hitting the Federal Reserve’s 2% target. In April, the consumer price index increased by 0.6%, and the one-year interest rate reached 3.8%, its highest point since May 2023. Additionally, wholesale inflation saw a rise of 1.4% last month, leading to an annual growth rate of 6%, the highest since December 2022.
As prices continue to climb, investors are reevaluating their asset allocations. Jared Woodard, an investment strategist at Bank of America, noted that, historically—from 2000 to 2019—low inflation and rapid globalization made investments in U.S. technology and government debt sufficient. However, he emphasizes that now, asset allocators must prepare for scenarios involving both inflationary booms and stagflation busts.
Woodard and his team identified several trades likely to benefit from inflation. Real Assets Commodities are capturing investor interest, especially with copper hitting record highs and oil prices remaining elevated due to the Iran situation. They focused on sectors like metals and mining, as well as master limited partnership equity ETFs, which are currently valued below long-term averages. For instance, the iShares US Basic Materials ETF (IYM) has gained over 20% this year and features an expense ratio of 0.38%. The fund includes companies like Freeport-McMoRan and Nucor, both expected to see double-digit growth by 2026.
Similarly, the Tortoise North American Pipeline ETF (TPYP), following the bank’s MLP strategy, has risen nearly 23% in 2023 with a 0.4% expense ratio. This ETF comprises companies such as TC Energy and Enbridge, and it offers a dividend with a current yield around 3.2%. Furthermore, the potential of nuclear power is growing in interest; the commodities team anticipates uranium prices could reach $135 by 2027, suggesting the rise could prompt investors to increase their long positions. The Global X Uranium ETF (URA) aligns with this trend, boasting a 22% gain this year and a portfolio including Okro and Uranium Energy, with an expense ratio of 0.69% and a dividend yield nearing 4%.
In addition, Bank of America recommends focusing on U.S. small-cap value stocks, which they deem some of the most affordable options, even after a 15% to 17% return so far this year. They also suggest international small-cap value, highlighting the Avantis International Small-Cap ETF (AVDV), which has risen 17% this year and has a 0.36% expense ratio. Another option on their list is the iShares U.S. Small Cap Value Factor ETF (SVAL), up 14% this year with an expense ratio of 0.20%.
