Investing in times of inflation

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By Gielie Fourie*

Gielie Fourie

INTRODUCTION: “Inflation is the most regressive tax of all, yet it is advocated by those who proclaim to be progressive” – Elon Musk. In economics inflation is a progressive increase in the general level of prices. Inflation erodes the purchasing power of money. While high inflation is generally considered harmful, some economists believe that a small amount of inflation can help drive economic growth. The US Federal Reserve targets a 2% inflation rate. Investors should invest in assets that grow at a higher rate than inflation. For example, current inflation in South Africa is 6.5% per year – your investment should grow at 6.5% plus at least 5% to protect you from getting poorer.

SOCIAL SCIENCE RESEARCH NETWORK (SSRN): A 2021 research paper by research house SSRN, “The Best Strategies for Inflationary Times”, looked at historical returns of different US equity sectors when the country’s headline inflation figure moved above 5% over the past 95 years. Its findings revealed that across all sectors only energy stocks showed positive annualised real returns. Energy-linked companies that focus on the exploration and production of oil, gas, and renewable energy sources were the optimal stocks to hedge against inflation, according to the report. The reason these companies benefit from inflationary spikes is that rising commodity prices, including the cost of energy, is what often drives inflation.

SCHRODERS: Research by UK asset managers, Schroders, found that during high periods of inflation, two of the best assets to hold were energy and Real Estate Investment Trusts (REITS). Energy, they found, beat inflation 71% of the time and could offer returns of 9% a year, higher than current levels of inflation, while REITs beat inflation 64% of the time.

WELLS FARGO: Wells Fargo, a US bank, looked at 15 major asset classes and calculated which ones did the best and worst during inflationary periods since 2000. The findings are instructive. It boils down to this: Inflation is bullish for oil. If you want to know what to own during inflation, know one word: Oil. Wells Fargo found the price of oil to jump more than 40% during inflationary periods since 2000. It surely tops the 10% inflation-period gain of U.S. large stocks like the S&P 500. Oil’s inflation-times rise is also more than any other major asset class the bank looked at. Oil’s gain during inflationary periods is also roughly three-times higher than the average 12% rise of all 15 assets Wells Fargo studied. Remarkably, investors have already sniffed this out. The United States Oil Fund (USO), a major ETF that tracks the price of oil, is up 89% in the past 12 months so far. That is a larger jump, too, than any other ETFs tracking the asset classes Wells Fargo analysed. Wells Fargo research shows that the three best asset classes to hold during times of high inflation are Oil, Emerging Market Stocks and Gold. The three worst asset classes to hold are US Large Cap Stocks, Value Stocks and lastly, High Yield Income Stocks.

BANKS: Banks could be another type of stock to buy during times of high inflation, as an unexpected spike in prices introduces the possibility of an interest rate hike by central banks. In 2022, the policy tightening cycle has already started, with central banks around the world, including the BoE, the Fed, and the Swiss National Bank, responding to inflationary pressures by raising interest rates and tapering bond buying programmes. That is good news for banks and lenders, as higher interest rates mean borrowing is more expensive, resulting in higher profits from lending margins. In theory, banks should benefit from an inflationary environment.

BOTTOM LINE: : It is noteworthy that Warren Buffett invested in Chevron, Occidental Petroleum and Citigroup this year – two oil companies and one bank. Investing during inflation can be risky. Analysts’ views can be wrong and should not be used as substitutes for your own research. Remember that past performance does not guarantee future returns. This is not investment advice. If you are concerned about investing in these times of high inflation and high interest rates, contact one of our highly qualified consultants.

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*Gielie Fourie, Research and Analysis, Director, Overberg Asset Management.

  • All writers’ opinions are their own and do not constitute investment recommendations or financial advice. Speaking to a qualified wealth and investment professional is crucial before making financial decisions.
  • ‘Overberg Asset Management (Pty) Ltd. is an authorised financial services provider: 783’

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