Investing when Inflation rises: what are the Options?

16 November 2022 - 17:17

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Investing during periods of high inflation can be risky because market sentiment is affected by uncertainty and it is difficult to predict how asset prices will behave.

Investing when Inflation rises: what are the Options?

Investors from Europe, but also those from anywhere else in the world, are currently facing a new set of challenges, with inflation posting a 3.5% month-on-month increase and over 10% on an annual basis.

In this delicate context, the choice of assets to invest in is even more important. The first step is choosing an investment intermediary, authorized and regulated, who can provide you with security (segregation and protection of funds), technology and reliability. One of these brokers is XTB, one of the most important one stop broker shop (access to all major financial markets on a single platform) publicly traded, fourth in the world by number of active customers.

The current economic-political scenario

Prices have gone up almost everywhere lately. Most of the causes - rising energy prices, pent-up consumer demand, aggressive fiscal stimulus - may be a direct result of the Covid-19 pandemic.
And, as we’re reminded on an almost daily basis, the pandemic isn’t over. At the same time, growing anxiety about inflation and war between Russia and Ukraine, which is estimated to be protracted, further worsens the situation.

Furthermore, many of the phenomena fueling inflation seemed transient at first, but economic pressures continue to increase. Supply chain problems, shortages of raw materials, labor and port congestion have broken key links in global supply chains, forcing prices to soar at a time when demand for goods was strong.

However, some of the resulting cost pressures could ease as supply chains are rebuilt and the effects of pent-up demand begin to wear off. But this transitory nature may not mean that the inflation rate will decrease in the near term: the prices of some goods, including housing, could continue to rise above pre-Covid-19 levels for some time. The automotive sector is another key factor to consider; inflation has been high in this sector and could remain at these levels if the semiconductor shortage is not resolved by 2023.

In this uncertain environment, investors can resort to strategies that have historically been profitable when prices were rising, given the possibility that inflation growth will continue further than in the last cycle, if not even as it did in the period before 1970s.

What type of investment to choose?

Stocks have historically given investors the best chance of beating inflation over the long term. Even with this strategy, active management is essential because inflation affects companies in different ways. For example, investors who lean towards companies that are somewhat protected, or that could benefit from rising prices, are likely to generate higher returns than strategies that track a specific benchmark. This category of companies includes, for example, energy producers or businesses that have low labor costs or have strong supply chains.

In particular, cyclical stocks tend to have a greater representation of sectors that could benefit from inflation, such as financials, energy and materials. Additionally, real estate (real estate, infrastructure) shares can be quite resilient to price increases, as many leases are inflation-linked and existing asset values tend to rise as land costs rise , labor and materials.

Multi-sector credit strategies that may lean towards floating rate bank loans and corporate bonds that are experiencing robust earnings growth can also perform well in an inflationary environment.
Inflation-Protected Treasuries (TIPS) will not provide the same level of diversification, but they can protect against unexpected inflation and provide a substitute if rates rise and inflation regimes change.

Always keep the risks in mind

Analyst opinions should not be used as a substitute for your own research into the investment you wish to make. Furthermore, analysts’ analyzes have a certain validity over time, and it is good to take them into account when defining your own investment strategy. Past performance is no guarantee of future returns.

If you’re looking for ways to profit from inflation, it’s wise to keep a cold and rational approach to historical data, bearing in mind that the world is constantly changing: economies evolve, sectors transform and consumption patterns change, which means that the impact of inflation can vary.

An investor should always pay attention to the whole picture to make a correct decision, being constantly updated on the world’s most important markets, news and events which invariably affect the evolution of financial markets.

Original article published on Italy 2022-11-15 10:30:00.
Original title: Investire quando l’inflazione cresce: quali sono le opzioni?

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