How to invest for inflation or deflation

Deflation looks like it will be around for a year or two. But what about further ahead? Will it linger, or will we see the return of high inflation? Cris Sholto Heaton looks at how different assets might cope with the twin threat of both inflation and deflation.

Diversification is once again in the doghouse. Investment theory tells us that a balanced portfolio of assets should reduce risk and smooth out returns. But the brutal truth is that almost all markets have been in a race to the bottom. Government debt is pretty much the only major gainer over the last year.

This shouldn't be too surprising. In a crisis, most assets collapse together as fear sends investors fleeing into cash. That goes double when many assets are bought using debt and the lender starts calling in the loans.

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China (CSI 300)2,344+2.3%
Hong Kong (Hang Seng)12,699-6.3%
India (Sensex)8,843-8.2%
Indonesia (JCI)1,297-3.1%
Japan (Topix)74-3.3%
Malaysia (KLCI)890-2.2%
Philippines (PSEi)1,881-2.0%
Singapore (Straits Times)1,595-6.5%
South Korea (KOSPI)1,066-10.6%
Taiwan (Taiex)4,437-3.4%
Thailand (SET)435-2.5%
Vietnam (VN Index)253-8.0%
MSCI Asia70-6.9%
MSCI Asia ex-Japan255-8.3%
Cris Sholto Heaton

Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.

Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.

He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.