(Special) - With inflation beginning to rear its ugly head, where can investors go to hedge their portfolios against the threatening economic malaise?

 

Financial experts suggest they should look at resources and global real estate. Inflationary pressures are starting to heat up, primarily from rising consumer demand in emerging economies such as China and India, which are growing at about 11 and nine per cent respectively.

"We are anxious about inflation because of the continued growth of the middle class of emerging economies, particularly China and India, who want to emulate the lifestyle of the middle class in developed economies," says Gavin Graham, chief investment officer with the Guardian Group of Funds. "We don't see inflationary pressures being tamed in the short run, although we may see some temporary relief with the slowdown in the U.S. economy that's transpiring at the moment."

 

Historically, real estate is a good hedge against inflation. Despite the real estate slump and subprime mortgage problems in the United States, real estate continues to be a good investment class.

"Rent and property prices have, in previous inflationary periods like the 1970s, kept pace with inflation," Graham explains. "Real estate is the ultimate local business. Individual markets are not correlated with each other: what happens with Japanese shopping centres has very little to do with German apartments or self-storage units in the United States."

 

Investors can tap the global real estate market in several ways.

One is to invest directly in property overseas, although that can be a risky proposition and requires good knowledge of the local market.

 

"The high Canadian dollar makes foreign real estate more attractive, and more Canadians are looking for real estate investment opportunities," says Patricia Lovett-Reid, senior vice president at TD Waterhouse. "But directly investing in global real estate can be risky and confusing. There's a lot of upside potential but also a lot of risk if you don't understand the local market."

 

The other is to invest indirectly through real estate stocks or mutual funds such as the Wisdom Tree Global Fund, which invests in 224 real estate companies in 19 markets, Lovett-Reid says.

The other good inflation-hedge investment is resources.

 

Demand for aluminum and other metals will continue to increase as emerging countries build their infrastructures. Similarly, oil prices will stay high for the next few years because demand is outpacing supply in the world market, again because of increased consumption from emerging economies.

 

In 1990, for example, emerging economies were virtually self-sufficient in oil. By 2006, however, their consumption had doubled but production had stayed virtually the same, Graham says.

 

"By 2021, we will need to find an extra two million barrels of oil a day from new sources just to fill this new demand," he says. "What we see in oil for the first time in 100 years is that supply and demand on a global scale is unbalanced. On the metal side, we see a similar situation of unprecedented growth in places like China and India."

 

As demand for resources goes up, so does the price - and pressure on inflation.

Investors can get into the resources sector by trading futures options and commodities. But, like buying real estate directly overseas, it is a risky game requiring trading savvy and knowledge of margins.

 

Perhaps the best way for investors to get into resources is again through mutual funds or by buying quality, oil and gas stocks.

 

"Mutual funds are a great way, but I wouldn't recommend having any more than five or 10 per cent in one sector," says Lovett-Reid. "And good quality oil and gas stocks, like Petro-Canada are a good option," she says. "They still make money even if oil is not at $100 a barrel."

 

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors. (boggsyourmoneyrogers.com)

Copyright 2007 Talbot Boggs

 

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