Can you still invest in times of inflation and rising interest rates?

While bonds can suffer from rising interest rates and prices, there are ways to save capital in such conditions.

Rising energy prices, deficits in several areas of activity, expectations of potential wage increases … The current environment is conducive to inflation. To limit the price spike, some central banks that regulate economic activity withare in the process of reviewing their behaviorin particular, raising their interest rates after more than a decade of keeping them extremely low.

However, these various increases do not affect the value of credit and the valuation of financial assets in general, including bonds, these securities, through which the state or company finances its activities and development, borrowing money in exchange for remuneration. .

In fact, fluctuations in interest rates affect the value of bonds, which falls as rates rise. As for inflation, it will weigh on the real profitability of the investor, rising prices will reduce the real yield of the bond.

2022.05.13.  Bond prices

Therefore, investors may logically wonder about the interest rate of the loan if the real yield and value of the securities they have decrease. This question also arises for individuals whose savings invested in life insurance are denominated in euro (1), who invest heavily in bonds.

How to protect your investment in this context?

First of all, there are special bond products, such as inflation-linked bonds, the advantage of which is that they have a coupon (interest paid) and the value of redemption, indexed to inflation. In other words, the interest paid by the borrower and the repayment of capital develop in line with inflation, thus keeping the investor from evolving prices.

In addition, as it allows you to identify opportunities and choose which securities to invest in, active governance (2) can help diversify investments, protect them from certain risks and increase efficiency.

Active portfolio management may also make it possible to use so-called hedging instruments. These are appropriate financial instruments – better known as derivatives – that can protect your portfolio from price fluctuations or interest rates or even allow you to profit from them. For example, buying derivatives that take into account the prospects of price developments can offset the adverse effects of inflation.

The investor’s ability to invest money around the world is another way to take advantage of geographical differences and / or diversify risk. As growth dynamics may vary from one country to another, price and growth rates can be very heterogeneous depending on the regions of the world. Companies from so-called developing countries, for their part, can offer higher returns because of a risk profile that is considered higher than that of European or American companies.

Who to entrust your savings to?

For an individual, investing directly in bonds can be difficult when the value of their issue (or face value) can reach several tens or even hundreds of thousands of euros. Therefore, it may be easier to do this through an investment fund. It is still necessary for these funds to be able to cope with such an environment during periods of rising rates or prices. Thus, it may be an opportunity for savers to check the capacity of the funds in which their money is placed.

At Carmignac, we have the skills – over 50 international analysts and managers – and experience –our first bond fund was established in 1989– respond to such questions. The ability to effectively manage market risks, as during the 2008 financial crisis or the Covid-19 crisis in 2020, has also been a cornerstone of Carmignac’s management style for many years. .

This culture of risk management, our independent research tools, the beliefs of our international managers and the synergy of ideas between our different teams are the pillars of our active investment approach. An approach that aims to achieve our customers’ long-term savings goals. In the fixed income universe, we offer several investment solutions with funds that have access to all types and all categories of bonds around the world. (Discover our range of bonds)

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