Inflation-busting investment strategies

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By Maria Smit *

If the theme for the past two years has been coronavirus, it’s difficult to argue that inflation won’t be dominating headlines for the next year, or two.

Maria Smit

With the US reporting a 30-year record-high inflation in 2021 of 7%, many commentators consider this a real threat that will have consequences.

South African investors won’t be immune to the fallout from rising prices because they’re expected to dampen consumer appetite. And the immediate consequence of lower income and profit is lower returns.

So, where do you turn and what do you do in times of rising inflation?

How does inflation impact investments?

Inflation impacts different investments in different ways – both good and bad.

For instance, savings in a fixed income fund will be losing its buying power unless returns keep pace with the growth in inflation. Other defensive assets like bonds will also suffer as the prices drop as investors lose interest, therefore lowering the value of the investment.

Equities can be a mixed bunch, depending on several factors. Some sectors will perform better when inflation is high, while others will undoubtedly report lower earnings as consumer spending contracts. Over the long term, however, equities tend to outperform inflation and defensive, fixed-income funds.

Other defensive solutions like money market funds could show better returns on the back of more interest rate hikes. Unfortunately, the cost of debt will also rise with interest rates, so cutting debt is one way to reduce the impact of rising inflation.

How to combat the impact of rising inflation

The first of a series of interest rate hikes have been announced by the SA Reserve Bank, so the powers that be are clear that inflation is no longer simply of academic interest. Likewise in the US, the Federal Reserve will be raising rates to combat the spike in inflation.

Offshore equity markets have proven to be the most appropriate long-term investment strategy for South African investors for a decade. This is likely to continue in a higher inflation environment because certain sectors will benefit, presenting growth opportunities for investors.

These opportunities will emerge from cyclical equity sectors that are very sensitive to improving economic growth and have done so when inflation has previously made an appearance.

Sectors expected to perform well include industrials and financials for their fundamental price and earnings prospects. Globally, manufacturing should perform well as new orders pick up and inventories restock to resolve some of the supply shortages.

Historically, financials have also benefited when a strong economy has helped raise credit quality, asset values, and lending rates. All of which help drive bank earnings.

Another popular investing theme in this environment is to buy companies whose products are used every day. Producers of consumer staples should benefit from continued support, despite the impact of inflation on prices at the till.

An easy entry point to these companies is found in the Ninety One Global Franchise Feeder fund and the Fundsmith fund that offer exposure to a great basket of cyclical shares.

Fit-for-purpose strategies

No matter the route you choose to take, always bear in mind that your investment decisions must be backed by solid reasoning that helps you achieve your goals.

So, if you are in the pre-retirement phase, growth would be your main consideration. In this case, equities are always going to give you the best growth opportunities over the long term, despite the occasional short-term volatility.

If you are retired and reliant on the income from your investments, then that is a totally different proposition because it is too risky to devote your entire savings to these volatile assets. Either way, now is not the time to shy away from investing.

A fund like the Global IP Opportunity Fund has a flexible mandate gives you actively managed equity exposure that allows the fund respond to any market changes.

The key is to remember that inflation or no inflation, the current environment will always create investment opportunities to exploit. It is recommended to consult an accredited, qualified financial advisor to choose the correct strategies for your investments, suited to your financial needs and goals.

Rather than finding ways to avoid rising inflation, devise a plan for long term success and stick to it.

Read more about investment planning.

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