Profitable investments in a period of inflation 

BY SOLA ONI   

Sola Oni, an integrated communications strategist, Chartered Stockbroker and Commodities Broker, is the Chief Executive Officer, Sofunix Investment and Communications. You can reach him at onisola2000@yahoo.com

One of the recurring decimal points in the ongoing global economic recession is the steady rise in inflation rates around the world. Managing inflation has consistently put many central banks under pressure. In Nigeria,  inflation rate in recent time has been on the upward swing. As at March it hit 22.04 percent from 21.91 percent in the preceding month with strong potentials to go higher.

Inflation is a double-edged  sword. It  generates unevenly rising prices, distorts the purchasing power of some consumers through erosion  of real income, and creates  uncertainties and volatilities.  But on the other hand, inflation provides robust investment opportunities in the financial market as some investments thrive during this period.  In the final analysis, major factors drive stock prices in the secondary market: the company’s performance, demand and supply and market hearsay. This is without prejudice to technical and fundamental analysis of stocks. Nigerian Exchange (NGX) has in recent times enjoyed occasional bullish and bearish trends, depending on the market mood and investor psychology.

However, an investor that has a long-term view can use stocks to hedge against inflation. Stocks tend to grow in value in the long term while holding a diversified portfolio such as 60/40 (Stock/Bond) has potential to protect an investor from declining purchasing power. Value stocks, inflation-protected bonds, and real estate are silver bullets that attack inflation.

A value stock refers to companies whose shares trade below intrinsic value otherwise called undervalued stocks. The security is identified by features such as high dividend yield and low price-to-book ratio (P/B ratio). The companies are noted for superior return. They are large and well-established. This is different from growth stocks which are shares of the companies that are expected to outperform the market over time because of their future potential. But growth stocks may refrain from paying dividends as it will reinvest retained earnings for expansion. An investor’s choice of growth or value stock depends on his investment objective, time horizon and risk tolerance.

Bonds can be linked to Consumer Price Index (CPI) whereby the principal is reset according to changes in index. 

This is where investors should contact their investment advisers called securities dealers. Under the current challenges in the global financial markets, inflation-linked-bonds  and Exchange  Traded Funds (ETFs), a basket of securities tradable on The Exchange, can play a vital part in protecting your portfolio’s value. Investment in real estates also works well with inflation. As inflation rises, property values rise accordingly, and landlords charge higher rental income. In the United States, there are Treasury Inflation-Protected Securities (TIPS) issued by the government. They are indexed into inflation to protect investors from a decline in the purchasing power of their money. Other assets that hedge investors against the scourge of inflation are: Real Estate Investment Trusts (REITs), commodities such as gold, oil, metal, and grain. 

The stock market investment legend, Warren Buffett, has always remained vocal on how to invest during inflationary period. Buffett’s company, Berkshire Hathaway, had in the late 1970s and early 1980s devoted significant portions of its annual letter to investing in stocks during inflationary periods in the United States of America. Buffett had reportedly warned, before the global financial crisis in 2007 and 2008, that “inflation would cause a shock, and after the crisis, central banking policy would ultimately force a reckoning in stocks.” As an ardent believer in stocks, his timeless statement is, “Be fearful when others are greedy and greedy when others are fearful.”

The global High Priest of investment,  believes that inflation swindles equity investors and therefore offered some tips for equity investors saying: “When you are doing great, it is time to remember inflation: During high inflation, earnings are not the dominant variable for investors: Understand the math of Misery Index; Inflation is a tapeworm that makes bad businesses even worse for shareholders: Focus on companies that generate rather than consume cash: Corporations cannot out-manage government and; There is no solution to inflation, but there’s reason for hope.”

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