Where to invest during high inflation?
- Investor sentiment suffers as monetary policy tightening tends to put markets into risk-off mode
- Traditional instruments do not give people adequate returns to beat high inflation
- Some bonds, like TIPS, provide interest rates that are linked to inflation
Global inflation has reached multi-decade highs as a result of supply-chain disruptions and increasing energy prices.
Inflationary surges are disappointing news for companies because they reduce profit margins and limit the capacity to plan, invest, expand, and enter into long-term contracts. During periods of high inflation, investor sentiment suffers as monetary policy tightening tends to put markets into risk-off mode. Traditional instruments do not give people adequate returns to beat high inflation.
Investing during an inflationary period might be difficult, but there are ways to weather the storm.
Commodities & commodity-linked stocks
The Best Strategies for Inflationary Times, a 2021 research paper, examined the historical returns of several US stocks and sectors when the country's headline inflation rate moved above 5% during the past 95 years. Its findings found that only energy stocks produced positive annualised real returns across all sectors.
According to the report, the best equities to hedge against inflation are energy-related companies.
These companies gain from inflationary increases since rising commodity prices, notably due to the cost of energy, are frequently what drives inflation.
Mining stocks, which extract raw resources from the earth, may also gain from inflation due to their significant exposure to commodity prices.
Investors may expect that if commodity prices are increasing, the stock prices of the companies that extract the commodities from the earth and sell them will likewise do well, if not outperform other sectors of the equity market.
When traded separately, all commodities had positive returns during inflationary pressure, averaging a 14% annualised return. In contrast, regular periods saw commodity returns in the single digits.
Real estate investment trusts (REITs)
House prices have always kept pace with growing prices. When investing during an inflationary period, real estate investment funds, or REITs, might be a good option. However, the likelihood of additional interest rate rises may negate some of the benefits in real estate as mortgages become more costly, reducing house demand.
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US Treasury Inflation-Protected Securities
Some bonds, like TIPS, provide interest rates that are linked to inflation, meaning their interest payments increase in line with the rate of inflation even though most bonds aren't wise investments during inflation.
It should be noted that investing during an inflationary period can be risky since market sentiment is harmed by uncertainty and it is difficult to foresee how asset values will respond. Analysts' opinions might be incorrect, and they should not be used as a substitute for one's own research.
Understand that past results do not guarantee future results. When looking for strategies to profit from inflation, one should take previous statistics with a grain of salt, keeping in mind that the world is always changing.