Inflation risks rising, investors told to buy scarce assets

Dubai: Investors should increase exposure to scarce assets such as real estate, infrastructure, commodities and precious metals as inflation risks build beneath a surface of strong global liquidity, according to DBS Bank Chief Investment Officer Hou Wey Fook.

“One approach is for investors to increase exposure to scarce assets. In an environment where rates are falling and the economy remains out of recession, ample liquidity can allow inflationary pressures to build gradually,” Hou said.

He described scarce assets as those characterised by limited supply and structural imbalances between availability and demand, conditions that historically allow them to outperform traditional financial assets when inflation rises and real yields decline.

“Scarce assets, characterised by limited supply and structural imbalances between availability and demand, are positioned to benefit in such conditions,” he said.

The growing focus on real assets reflects a broader shift in global inflation dynamics, which Hou believes is no longer driven primarily by temporary factors such as tariffs or supply disruptions.

“We believe global inflation dynamics are undergoing a structural shift. The long term inflation equilibrium appears to be trending higher than in the past two decades,” he said.

Market based indicators support that view, with long term inflation expectations in the United States and Europe rising steadily from post pandemic lows, while global forecasts suggest inflation will remain elevated through the rest of the decade.

Despite these structural pressures, markets are yet to fully price in the longer term risks linked to rising government debt and persistent fiscal deficits.

“In the near term, we are not yet seeing meaningful risk premiums being priced into financial assets. Liquidity remains abundant, as reflected in the more than $7 trillion currently parked in US money market funds,” Hou said.

He warned that continued loose fiscal policy could eventually force markets to adjust through higher credit spreads, steeper yield curves and weaker equity valuations.

Rather than serving as defensive additions, real assets are increasingly becoming essential portfolio components in an environment where inflation risks remain persistent.

“Historically, commodities have outperformed most clearly during periods of rising and unexpected inflation. However, rather than concentrating risk in a single asset class, we believe investors should adopt a diversified approach across a broader range of scarce assets,” Hou said.

Diversification across real assets, he added, helps improve portfolio resilience while preserving real value in inflationary environments.

Global equity markets continue to benefit from abundant liquidity, yet elevated valuations leave limited room for error should conditions tighten.

“Parts of the market are increasingly priced for perfection and have limited buffer against earnings disappointments or tighter liquidity conditions,” Hou said.

He recommends shifting exposure toward less crowded sectors such as financials and healthcare, which offer stronger earnings resilience and more stable demand patterns.

The UAE dirham’s peg to the US dollar provides an additional advantage for investors in the region by reducing currency volatility and simplifying portfolio construction.

“We do not see a strong case for additional currency hedging for UAE based investors. The UAE dirham’s peg to the US dollar helps limit currency volatility over the medium to long term,” Hou said.

This stability allows portfolios in the UAE to be structured similarly to US dollar portfolios, with performance driven primarily by corporate fundamentals rather than exchange rate movements.

Hou also cautioned that many investors continue to hold excessive levels of cash despite rising inflation risks.

“We continue to observe that many investors are holding disproportionately high levels of cash. In a rising inflation environment, cash risks losing purchasing power over time,” he said.

He advocates a balanced investment approach combining income generating bonds, growth equities and diversifying assets such as gold to strengthen resilience in an increasingly complex global investment landscape.