Sumit Barman

[Vikas Vij @TheClubJunto]

Strategies for Inflationary Times

1. BofA: Commodities will replace stocks & bonds as the biggest winners of 2026-2030

2. BlackRock pivots from bonds to commodities 3rd time in 50 Yrs

3. Study: 8 inflationary periods in 100 yrs. Avg Return: S&P -7%; Commodities +14%

STRATEGY:

BofA: Go Big on Commodities

a. Bank of America Global Research Chief Michael Bartnett has written to BofA’s investors about bubble risks. Instead of real demand & productivity, it is a debt & liquidity play going on.

b. The “boom loop” (bubble keeps getting bigger) continues for now. But 30-yr Treasury Yield around 5% is the "danger line.” Once this line is crossed, the bubble will break, Bartnett warned.

c. Short-term investors can keep playing the stock boom. But long-term investors should move into commodities for the rest of the decade. Inflation, supply chain risks, and the global race to monopolize critical minerals will create tailwinds for commodities.

BlackRock’s Commodities Pivot

a. The world’s largest asset manager BlackRock powered by risk engine Aladdin running 5,000 risk scenarios per day is making a historic pivot to commodities.

b. Traditionally, $12 trillion AUM giants like BlackRock follow the 60/40 Rule: 60% stocks; 40% bonds. For the third time in 50 yrs, BlackRock is moving a part of client capital from bonds to commodities (for 4 consecutive quarters) as a portfolio diversifier.

c. BlackRock says that the prevailing supply shocks will act like a “tax on consumers.” Gold, Copper, Uranium, Energy, and other commodities are their “Plan B.”

Research Study 1926-2020

a. Duke University and Man Institute study 2021 analyzed inflation data from 1926 to 2020 in US, Europe, Japan. They identified 8 distinct periods when inflation was trending above 5%.

b. In each of these 8 inflationary periods, commodities proved to be the best-performing asset class with +14% average annual real returns. S&P 500 real returns were negative 7%. [Real return is inflation-adjusted return.]

c. Momentum investing delivered the highest returns. Inflationary regimes create long "trends" (like oil rising for 2 yrs straight or bonds falling for 3 yrs). Momentum funds capture these long cycles while traditional "buy and hold" portfolios get crushed.

d. The study found that residential real estate delivered negative real returns (-2%). During inflationary periods, real wages fall and home loan rates rise. (RBI will be forced to raise interest rates to curb inflation.)

e. Recency Bias: New investors have only seen low inflation for many years. In high-inflation periods, “Present Value” of future cash flows goes down (future money’s worth diminishes). So, even if profits remain same, stock price drops as investors no longer want to pay high forward P/E multiples.

Strategy for Small Investors

[If domestic inflation CPI exceeds RBI’s upper tolerance limit of 6%]

a. Do not average down your stocks. If a new investment drops 10-15%, be unsentimental and exit. You may get it at 50% discount later.

b. Allocate 15-20% of your portfolio to gold. Gold is a double hedge for Indian investors. It can protect you against high domestic inflation PLUS against falling rupee (as gold rates are determined in dollars.)

c. Consider selective exposure to stocks of metal and energy (oil & gas) producers. Their margins expand as commodity prices rise.

d. Shift a part of your core equity to Momentum Index Funds. This will automatically move your money into sectors winning the inflation battle.

e. Invest partially in US Index Funds (S&P 500 or Nasdaq 100) for currency hedging. This way any rupee depreciation will create gains for your dollar-denominated assets, protecting you against purchasing power erosion.

f. Avoid speculative trading using leverage. High-inflation environments produce sharp market swings that can wipe out speculators. Remember: “Smart men get ruined only in 3 ways: Liquor, Lust, and Leverage.” [Charlie Munger]

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