Some investors have concluded that the answer to the problem of a low-risk asset (bonds) becoming un-investible is to buy lots more risky assets via equities. This is a prime example of the frequently quoted financial nihilism of the digital age: ‘There Is No Alternative’ (TINA). And so long as there are no more attractive assets available, equity investors can rest assured that there will always be a willing buyer for their stock.
But the case for owning equities doesn’t just rely on the absence of better options. Many investors consider equities a direct inflation hedge. The logic is simple: companies may suffer from rising costs, but they can pass these on to their customers by raising prices. By doing so, they protect the real value of their cash flows.
Most investors recognise that inflation is uneven, prices rise faster in some industries than others, and so they seek broad and diversified equity exposure – often by tracking an index.
However, this strategy might not afford investors the protection they expect.