Investors must not stop investing or saving during periods of high inflation but rather look to increase their exposure to multiple asset classes to ensure their investments outperform inflation over the long term.
This is according to the head of investments at FNB Wealth and Investments, Renzi Thirumalai.
Thirumalai highlighted that global inflation continues to slow. The latest data from the United States showed inflation easing to 6.0%, down from 6.4%, the slowest pace since September 2021.
South African inflation has remained elevated, with the latest Consumer Price Index (CPI) increasing to 7% in February 2023.
However, weaker global economic activity and easing supply chain pressures should support softer inflation this year, FNB senior economist Koketso Mano said.
Mano’s outlook for South African inflation is different: “logistical inefficiencies and local production limitations caused by the availability of energy raise operating and living expenses, weaken confidence, and choke the economy’s potential”.
“If your money is growing at a rate lower than the general increase in the cost of goods and services, your savings are losing value year after year,” says Thirumalai.
How to beat inflation
Investors should not stop investing or saving out of concern for inflation but instead focus on their investment objectives.
“As an investor, you don’t have to time the market and say I will only invest when inflation is low or high. You need to invest throughout market cycles”, said Thirumalai.
The first step is to be clear about the objective of your investments.
“You must invest with a certain objective in mind. Inflation will increase the actual cost of your goal over a given period”. You also have to be disciplined in sticking to this objective.
To account for the impact of inflation on your objectives, you need to invest in asset classes whose returns are expected to be above inflation.
The strategy recommended by Thirumalai is to use complementary asset classes to help achieve these objectives and minimise risk.
The three most prominent asset classes mentioned by Thirumalai are listed below, along with how they perform relative to inflation.
- Equities – Investors need to look at unit trusts, balanced funds, equity funds, and offshore equities. Since the returns on these asset classes are higher than inflation, the real value of the investment is not diminished by inflation.
- Property investment – Rentals and consumer price rises are tightly correlated. As a result, real estate investing typically serves as a successful inflation hedge. Rental revenue usually rises yearly along with inflation, protecting your money over the long term.
- Bonds – Investors must consider bonds in South Africa because they offer good returns. A bond Exchange Traded Fund (ETF) is one of the vehicles investors can look at in this space to minimise the complexity and risk of investing in bonds.