How to hedge your portfolio from inflation
The issue of high inflation is nothing new to Nigeria. In fact, since February 2015, the country has maintained an inflation rate above 10%, causing a significant decrease in the purchasing power of the Naira. Within living memory, the average cost of a bottle of Coca-Cola was N50, but as of today, the price is N150.
This increase in the prices of goods and services ranks high on the list of risks investors face. Inflation has a rather insidious effect on the average investor’s portfolio as you must constantly generate returns above inflation to achieve real progress toward financial goals. What this means is that, with the current inflation rate rising to15.7% as of February 2022, the average Nigerian investor must have generated returns above 15.7% to preserve the value of their investments within the same period.
Note that this issue isn’t peculiar to Nigeria alone; the globalized nature of the world means that an industrial strike in Brazil could affect the prices of commodities in France, and an event halfway around the world could affect your hometown. It’s hardly surprising that supply chain disruptions caused by pandemic-related lockdowns and recently exacerbated by the Russia-Ukraine conflict continue to truncate the supply of essential commodities worldwide, keeping the prices of goods high.
However, for countries like Nigeria with a volatile economy, the situation is grimmer. If you are inclined to invest, you have your work cut out in constantly generating returns above inflation to achieve real progress toward financial goals.
So, how do you invest during periods of high inflation?
The current economic climate looks bleak when considering certain factors, but it’s not all doom and gloom. The good news is that there are ways for you to preserve your hard-earned wealth from the corrosive impact of inflation. The secret to making money in an inflationary climate is to hold investments that appreciate faster than the inflation rate. This is conceivable because not all assets are adversely affected by inflation. What you need to do as an investor is identify the best ways to mitigate the effects of inflation on your investments.
Here are a few ways to deploy your finances wisely, so you can stay afloat even when the economy appears to be sinking:
Invest in Commodities: Research shows that inflation is often linked to the supply and demand of crucial commodities, and the prices of commodities typically appreciate during inflation. Thus, commodity investors can benefit significantly during periods of high inflation.
To keep your head above water, you can invest in physical commodities or commodity-focused funds, which invest in derivatives linked to a specific commodity or a basket of commodities.
Another way you can invest in commodities is to purchase stocks of commodity-producing companies like miners and oil producers, as they tend to generate higher revenues and profits during periods of commodity-led inflation. However, keep in mind that commodities are highly volatile and sensitive to fluctuations in demand and supply.
Invest in Stocks: In principle, investing in stocks should protect investors against inflation. This is because an increase in prices should lead to higher revenues and thus boost profits and share prices. However, this is not always the case, as different sectors fare differently in times of inflation, and not all businesses enjoy sufficient pricing power to pass on rising costs to customers.
When it comes to investing, you should focus on strong companies with pricing power and high barriers to entry. You can also look to companies dealing in strategic sectors like hard commodities and Fast-Moving Consumer Goods (FMCGs), which benefit from inflationary forces.
Invest in Real Estate: As inflation rises, so do property valuations, and landlords would be inclined to charge higher rents. This results in higher rental income for owners of the property. So, when you purchase landed property, you place yourself in the position to benefit from the rising cost of real estate.
You can gain direct exposure to real estate by buying properties directly. Alternatively, you can delve into Real Estate Investment Trusts (REITs) if you cannot afford entire properties to invest in a unitized way.
Shift to Short-Duration Fixed Income: Suppose you are concerned about the impact of rising inflation on your assets, particularly fixed-income investments. You may want to consider moving away from long-term bonds and instead focusing on short-term bonds or treasuries. Furthermore, the ‘fixed income’ on long-term bonds will progressively lose value as inflation increases. Thus, moving to a shorter-duration fixed income gives you the flexibility to benefit from changes in interest rates.
How can you access these investment options?
Many investors may lack the time, expertise, finances, or access to certain assets. This is where the service of a professional Fund manager comes in handy. Investing in collective investment schemes such as Mutual Funds allows investors to pull funds together and benefit from the professional expertise of Fund managers and financial advisors, who can best manage portfolios during periods of high inflation.
They can help unitholders diversify their portfolios and spread their risk across various assets.
At United Capital, we are constantly developing products to meet the needs of investors. We currently have seven mutual funds, namely the United Capital Equity Fund, United Capital Balanced Fund, United Capital Money Market Fund, United Capital Fixed Income Fund, United Capital Eurobond Fund, United Capital Sukuk Fund, and United Capital Wealth for Women Fund. These funds are focused on different asset classes that meet investors’ varied risk appetites and investment objectives. For instance, the Equity funds are suitable for investors looking for capital appreciation, whereas the fixed income biased funds are designed for investors seeking capital protection and consistent income. Similarly, the Eurobond Fund protects against devaluation and inflation while also generating competitive returns for investors’ assets denominated in US Dollars.
In closing, the rising inflation within the economy has for a while been considerable concern for Nigerian investors and will likely continue to dampen returns in the foreseeable future. Therefore, it is essential for investors to re-assess their portfolios and adjust their exposure to inflation accordingly. However, what is more important is for investors to stay invested in protecting the value of their capital instead of keeping it idle.
For further information about our mutual funds, please visit www.investnow.ng or download the InvestNow app on Google Play Store and/or iOS App Store or send an email to firstname.lastname@example.org
Written by Odiri Oginni – MD/CEO, United Capital Asset Management Ltd.