Navigating Stagflation: Fidelity's Q2 2025 Hedging Strategy in Gold, TIPS, and Global Assets

In the shadow of 2025's volatile economic landscape, Fidelity's Q2 2025 portfolio positioning offers a masterclass in stagflation hedging. With inflation stubbornly above the Federal Reserve's 2% target, record-high US tariff rates, and a tightening labor market, the risk of stagflation—a toxic mix of high inflation and stagnant growth—has become a pressing concern. Fidelity's Active Asset Allocation Board, a collective of seasoned portfolio managers, has responded with a strategic blend of gold, Treasury Inflation-Protected Securities (TIPS), and non-US assets to mitigate these risks. This article dissects their approach and evaluates its relevance for today's investors.

Gold: The Timeless Inflation Hedge

Gold's role in Fidelity's Q2 2025 strategy is emblematic of its historical resilience during periods of economic stress. The board emphasized gold as a key tool to counteract currency devaluation and inflationary pressures, particularly in a weak dollar environment. While the broader commodities market lagged, gold delivered double-digit gains year-to-date, with Q2 performance reinforcing its appeal.

The rationale is straightforward: in a stagflationary scenario, where traditional assets like equities and bonds falter, gold's intrinsic value and lack of correlation to fiat currencies make it a safe haven. Fidelity's overweight position in gold reflects a recognition that monetary policy constraints and policy-driven volatility (e.g., large tariff hikes) could erode fiat value, making physical assets like gold increasingly attractive.

TIPS: Guarding Against Inflation Erosion

Treasury Inflation-Protected Securities (TIPS) are another cornerstone of Fidelity's stagflation hedge. These bonds adjust their principal value in line with the Consumer Price Index (CPI), ensuring that investors' purchasing power remains intact. In Q2 2025, portfolio managers highlighted TIPS as a strategic addition to portfolios, particularly as real yields (inflation-adjusted yields) remained elevated.

The board's emphasis on TIPS underscores a pragmatic approach: while cash and nominal bonds lose value in inflationary environments, TIPS provide a direct hedge. For investors seeking income streams that keep pace with inflation, TIPS offer a unique advantage. Fidelity's inclusion of TIPS aligns with its broader goal of preserving capital and generating inflation-protected returns.

Non-US Assets: Leveraging Dollar Weakness and Valuation Gaps

The weakening US dollar in Q2 2025—down over 10% year-to-date—has amplified the appeal of non-US equities and bonds. Fidelity's Active Asset Allocation Board noted that developed and emerging market currencies were at historically low valuation levels relative to the dollar, making foreign assets a compelling diversification play.

Non-US equities, including those in Latin America (+15.2%), Canada (+14.2%), and Emerging Asia (+12.4%), outperformed their US counterparts, driven by attractive valuations and regional economic resilience. Similarly, high-yield corporate bonds and emerging-market debt in non-US markets posted robust returns, with credit spreads tightening amid improved risk appetite.

The strategic tilt toward non-US assets is twofold: it diversifies geographic risk and capitalizes on the dollar's overvaluation. For US investors, this approach not only mitigates stagflation risks but also taps into the global economy's unsynchronized growth.

The Stagflation Hedging Framework

Fidelity's Q2 2025 strategy is a mosaic of defensive and growth-oriented assets. By combining gold's inflationary resilience, TIPS' income protection, and non-US assets' diversification benefits, the board has constructed a portfolio that navigates stagflation's dual threats.

• Gold and TIPS act as the first line of defense, protecting against currency devaluation and inflation.
• Non-US assets serve as a growth engine, leveraging dollar weakness and undervalued global markets.

This layered approach is particularly relevant today, as policy-driven inflationary pressures (e.g., tariffs, fiscal expansion) and economic stagnation risks converge. For individual investors, mirroring this framework could mean allocating a portion of portfolios to gold, TIPS, and international equities/bonds to balance risk and reward.

Investment Advice: Building a Stagflation-Resilient Portfolio

1. Allocate to Gold and TIPS: Investors should consider 5–10% of their portfolio in gold and 3–5% in TIPS to hedge against inflation and currency risks.
2. Diversify into Non-US Assets: A 15–20% allocation to international equities and bonds can capture growth in undervalued markets while reducing dollar-centric risks.
3. Maintain a Balanced Risk Profile: While Fidelity's strategy leans on risk assets, investors should adjust allocations based on risk tolerance, ensuring liquidity and downside protection.

Conclusion

Fidelity's Q2 2025 positioning offers a blueprint for navigating stagflation in an era of policy uncertainty. By integrating gold, TIPS, and non-US assets, the board has demonstrated how diversification and strategic hedging can mitigate inflationary and economic stagnation risks. For investors, the takeaway is clear: stagflation demands a multifaceted approach, and Fidelity's playbook provides a roadmap to resilience.