The types of funds and shares to shield against inflation

“History repeats itself as tragedy.” Investment commentary doesn’t often begin with a quote from Karl Marx, but the German economist and political theorist’s famous observation feels more apt than ever.

In February 2022, Russia invaded Ukraine, prompting an international economic crisis and a plunge in asset prices. In February 2026, the US and Israel went to war in Iran; that decision has had similar results. For investors, that prompts a critical question – should they dust off the inflation playbook from four years ago, and rethink their asset class and fund exposures?

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War is above all a human disaster. The adverse economic impacts on UK citizens of the Middle East conflict cannot be compared to the awful consequences for those directly affected in Iran, Lebanon and throughout the region. Nevertheless, those impacts are real – on the cost of living, and on the prospects for people’s savings and investments. Western reliance on oil and gas imports has been exposed, just as it was when the Ukraine war shut off Russian energy supplies.

The International Monetary Fund (IMF) now expects UK inflation to peak at 4% this year, compared to its pre-war forecast of 2.5%, with higher oil prices already feeding through into the cost of everyday items including fuel, food and transport. That’s some way off the 11.1% high seen in October 2022 amid the Ukraine crisis but is still twice the 2% rate that the Bank of England targets. That could put pressure on the Bank’s Monetary Policy Committee (MPC) to raise interest rates – prior to war, economists had expected rate cuts this year – although Governor Andrew Bailey insists the MPC will take a long-term view.

Volatility picks up

With economies worldwide experiencing similar effects – and policymakers everywhere mulling their response – asset prices have been volatile since the US and Israel launched their campaign.

Some stock markets fell by as much as 10% during the early weeks of the war, but many have bounced back, particularly amid hopes that the ceasefire agreed in April might lead to permanent peace. Bond prices have also fallen sharply, especially in Europe. Yields in the UK, for example, are up by around 55 basis points – and showing fewer signs of retrenchment despite peace hopes.

Again, this mirrors what happened in 2022. European shares, in particular, fell sharply, losing more than 10% during the first weeks of war in Ukraine. The increase in bond yields, which rose a full percentage point in Europe, was even more dramatic than in the current crisis – and borrowing costs similarly took longer to come down.

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The question now is whether peace will hold in the Middle East. If so, it is possible a more serious economic crisis can be avoided. However, there are no guarantees – and an extended conflict will only pile on the misery.

Expect the inflationary impact to be even more marked, particularly as energy and fuel shortages hit supply chains in industries such as agriculture. Commodity prices have not yet surged as dramatically as when Russia invaded Ukraine – known as the breadbasket of Europe for its huge exports of grain, corn and sunflower oil. But UK retailers have already started to warn of likely food shortages in the summer if the flow of oil and gas, critical for fertiliser production, is not restored soon.

Tried and tested approaches

Where does all this leave investors? Well, while the current crisis is different to 2022 in many respects, investment strategists do think it’s worth considering some of the strategies that paid off then. In both equity and bond markets, as well as in real assets, there are now some tried and tested approaches to investing in an inflationary environment.

It’s the third of those asset classes that is attracting the most attention. “Real asset strategies provide one of the most direct ways to navigate persistent inflation, particularly when driven by commodity and energy shocks,” says Dzmitry Lipski, head of funds research at interactive investor. “Exposure to areas such as commodities, natural resources and infrastructure allows investors to benefit from rising input prices and inflation-linked revenues.”

It’s an important point. Energy and materials producers typically see earnings improve when commodity prices rise, while infrastructure assets often have contractual or regulated income streams linked to inflation. Lipski suggests WisdomTree Enhanced Commodity ETF - USD Acc GBP (LSE:WCOB) and the FTF ClearBridge Global Infrastructure Income WAcc fund as good options for exploring those themes.

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Cameron Garder, head of distribution at Gravis Capital Management, also points out that focusing on energy infrastructure can help investors ride out energy price volatility, to which energy company shares may be more susceptible.

“Elevated energy prices tend to invite greater political and regulatory scrutiny, which can weigh on valuations in the short term,” Garder points out. “From a longer-term perspective, the same dynamics are reinforcing the strategic importance of energy infrastructure: from generation through to networks, storage and system resilience, a huge amount of investment is required to modernise the UK’s energy system.”

That’s not to suggest steering clear of traditional asset classes altogether, with both equities and bonds still offering potential opportunities to manage inflation.

Indeed, Laura Foll, co-manager of Lowland Ord (LSE:LWI) and Law Debenture Corporation Ord (LSE:LWDB) investment trusts, makes the macro case for retaining plenty of equity exposure.

“If you invest in companies that have pricing power, your income should rise because they’re more likely to be able to pass on rising input costs and therefore hold, or ideally grow, their earnings and dividends in real terms,” Foll says. “It’s not true all the time – in extreme periods like just after Russia’s invasions of Ukraine, dividends failed to keep pace with inflation – but over the long term it tends to apply.”

Lipski adds: “Global equity income strategies are well positioned in a prolonged inflationary environment driven by energy shocks, with sectors such as energy, infrastructure, consumer staples and healthcare tending to dominate.” Lipski singles out the Fidelity Global Dividend W Acc fund as his preferred option, pointing to its lower US concentration and its focus on sustainable dividends.

‘HALO’ stocks

Elsewhere, Daniel Lockyer, a senior fund manager at Hawksmoor Fund Managers, makes the case for what he describes as “HALO stocks” – meaning companies with heavy assets and low obsolescence. They’re typically found in industries including oil and gas, telecoms and resources.

Lockyer explains: “These companies have sunk costs from heavy infrastructure investments over the years, such as oil rigs, factories, machinery, telecom towers and mines. Competitors can’t enter these industries now, as the cost of capital and debt is much higher than it was five years ago, and we all have to buy their products regardless of higher prices.”

Investors will need to tread carefully, however. The stocks that performed strongly in the wake of Russia’s invasion of Ukraine won’t necessarily repeat the trick. For example, consumer staples companies performed well then thanks to the potential of their pricing power to protect margins from inflation, but valuations now look stretched and the cost-of-living crisis has already forced consumers to experiment with cheaper alternative products.

Commodities and bonds

Similarly, gold miners – and gold itself – is often regarded as a good inflation hedge, but soaring prices last year amid heightened geopolitical uncertainty has seen investors take profits in recent months.

As for the bond market, the key will be to discriminate, argues Jack Holmes, the co-manager of the Artemis Monthly Distribution I Acc fund. “Central banks tend to raise interest rates in times of inflation, which is not good for bonds,” Holmes says. “But history suggests shorter-dated high-yield bonds are less exposed at periods like this, given their higher level of income and lower level of exposure to interest rates.”

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Look for a bond fund with a more flexible mandate on portfolio construction, counsels Lipski, since this will enable the fund to increase exposure to these pockets of opportunity. Strategic bond funds give managers much more freedom.

“The flexibility to dynamically shift between government bonds, credit and global markets is particularly valuable as volatility increases,” Lipski says. “These strategies aim to provide a balance of income and capital preservation, offering a more resilient approach than static fixed-income allocations.”

One option, he suggests, is the Jupiter Strategic Bond I Acc fund. It operates with an unconstrained strategy designed to deliver both income and growth by enabling managers to choose securities from across the full fixed-income spectrum. The fund’s long-term performance record – including during the Ukraine crisis – suggests the experienced management team has done a good job of exploiting this flexibility.