Persistent inflation risks drive investors toward real assets and diversified portfolios.
Dubai: Investors are advised to increase exposure to scarce assets—such as real estate, infrastructure, commodities, and precious metals—as inflation risks rise beneath a backdrop of strong global liquidity, according to Hou Wey Fook, Chief Investment Officer at DBS Bank.
“One strategy for investors is to increase exposure to scarce assets. In a climate of falling rates and an economy that remains out of recession, abundant liquidity can allow inflationary pressures to build gradually,” Hou said.
He explained that scarce assets are defined by limited supply and structural imbalances between availability and demand—conditions that have historically enabled them to outperform traditional financial assets when inflation rises and real yields fall.
“Scarce assets, defined by limited supply and structural imbalances between availability and demand, are well-positioned to benefit in such conditions,” he said.
Inflation entering a structural phase
The increasing focus on real assets reflects a broader shift in global inflation dynamics. Hou believes inflation is moving beyond temporary factors, such as tariffs or supply disruptions, and entering a more structural phase.
“We believe global inflation dynamics are undergoing a structural shift. The long-term inflation equilibrium now appears to be trending higher than it has over the past two decades,” he said.
Market-based indicators support this view, with long-term inflation expectations in the United States and Europe steadily rising from post-pandemic lows, while global forecasts suggest inflation is likely to remain elevated throughout the rest of the decade.
Liquidity masking deeper risks
Despite these structural pressures, markets have yet to fully price in the longer-term risks associated with rising government debt and persistent fiscal deficits.
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, reducing the need for active FX management.
Inflation risks rising, investors told to buy scarce assets
Hou Wey Fook, Chief Investment Officer at DBS Bank, said: “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.”
He warned that continued loose fiscal policy could eventually force markets to adjust through higher credit spreads, steeper yield curves, and weaker equity valuations.
Real assets becoming core allocations
Rather than serving merely 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.
He added that diversification across real assets helps improve portfolio resilience while preserving real value in inflationary environments.
Equity markets face valuation risks
Global equity markets continue to benefit from abundant liquidity, yet elevated valuations leave little room for error if 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.
Currency stability supports UAE investors
The UAE dirham’s peg to the US dollar provides an added 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 UAE-based portfolios to be structured much like US dollar portfolios, with performance driven primarily by corporate fundamentals rather than exchange rate movements.
Holding cash poses long-term risk
Hou also cautioned that many investors continue to hold excessive levels of cash despite rising inflation pressures.
“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 that combines income-generating bonds, growth equities, and diversifying assets such as gold to enhance portfolio resilience in an increasingly complex global investment landscape.
