As inflation nears a 40-year high, our Wealth Preserver portfolio faces quite a fight

Our holdings are likely to exhibit further volatility but look well placed to overcome sustained high inflation.

Inflation is likely to reach its highest level for more than 40 years in the coming months, according to the Bank of England. The Bank raised its inflation forecast for the current quarter from 8pc to 9pc in its latest monetary policy report and now expects inflation to average 10pc in the final quarter of the year.

Seemingly uncontrollable inflation has already prompted interest rate rises at each of the past four meetings of the Bank’s Monetary Policy Committee. Because of the scale of the problem it expects to have to raise rates further.

It has said it forecasts interest rates to reach 2.5pc by the middle of next year. These increases could arrive swiftly, given that three of the MPC’S nine members voted for a rise of half

a percentage point at the last meeting, as opposed to the more modest quarter-point increase favoured by the majority of the committee.

In Questor’s view, it would be unsurprising for inflation to exceed current expectations over the coming months. After all, recent forecasts have generally been behind the curve and they can be blown off course by highly unpredictable external events. However, interest rate rises may be more muted than the increase in inflation itself because of a likely slowdown in economic activity and the prospect of “stagflation”.

This threat has hit a number of the holdings of our Wealth Preserver portfolio over recent weeks. Since this column’s last update in April, the outlook for the stock market has markedly deteriorated and our stock holdings are now down by 16pc on average since purchase.

However, we retain our upbeat assessment of their ability to pass higher costs on to customers to deliver robust levels of profit growth in an era of high inflation.

The weakening economic outlook has also hurt our property and infrastructure holdings in recent weeks. However, they have still made a positive contribution to the portfolio since their addition to the portfolio in August 2021, while our bond holdings have gained 1pc since purchase despite impending interest rate rises.

Encouragingly, gold’s price has held up well in sterling terms since our last update. Our holding in the metal has gained 17pc since our purchase in April last year; a weaker pound has aided its recent performance. Its near-term outlook remains uncertain thanks to the conflicting influences of rising US interest rates and heightened economic challenges. But it remains a worthwhile asset with which to fight high inflation.

Our commodity holdings have weighed on the portfolio’s performance of late. An uncertain global economic outlook, Covidrelated challenges in China and a stronger dollar have contributed to heightened volatility in commodity prices. However, an average return of 11pc since purchase in October last year for our four commodity holdings highlights their strong performance so far.

Antofagasta remains among this column’s preferred commodity picks. The copper-focused miner released a first-quarter production report last month that said it remained on track to meet full-year guidance despite a drought in Chile. Even so, its shares have fallen by 21pc in the past month and now trade 4pc lower than at the time of our purchase in October last year.

In Questor’s view, the stock’s priceto-earnings ratio of 11.7 suggests that it offers good value for money given the bright long-term future for copper prices. High copper demand for a wide range of applications including environmental infrastructure and electric vehicles, coupled with constrained supply growth owing to a lack of major discoveries in recent years, constitutes a favourable backdrop for Antofagasta.

As a result, its capacity to offer long-term inflation-beating earnings growth remains intact. Its share price could remain volatile in the near term given the prospect of stagflation and ongoing political risk in Chile, highlighted at the company’s annual meeting this week.

But its net cash position, attractive assets and exposure to areas that offer long-term growth potential earn it a continuing place in our Wealth Preserver portfolio. Hold.