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For much of the developed world, Central Banks firmly stick to around 2% inflation target and investors benefit from long periods of low single-digit inflation. Overall money supply is usually kept under strict control, maintaining the low inflation rate and the purchasing power of the currencies.
Inflation in developing countries was on average well above 10 per cent between 1990–2000, it fell to 5.6 per cent between 2001–2010 and 4.8 per cent between 2011–2020. In 2021, inflation surged to 6.3 per cent and is projected to rise substantially further in 2022.
In Zimbabwe to be specific we are going through a period of high inflation with annual consumer price inflation climbing further to 285% in August of 2022, from 256.9% in the prior month. It was the highest reading since February of 2021, amid general increases across categories of goods and services.
Skyrocketing inflation is putting investors in a complicated situation – very few traditional asset classes are currently capable of providing positive real returns.
Stock markets have been performing very well for the last few years, but in the light of the upcoming interest rate hikes and global uncertainty we have already seen a quite significant correction and in the short term, this asset class will probably not shine as it used to do.
The worst thing about inflation is that you would need to take action to avoid the loss of the purchasing power of your savings.
Any investment activity should aim to increase the real, inflation-adjusted value of the portfolio. Investing in an inflationary environment is no different. Your main goal should be finding the assets that outperform inflation, and if there are none, or the ones available are too risky, rebalance your savings and investments into the assets maximizing the currently available returns (even if the real rate of return remains negative).
Real estate has historically been doing great in the inflationary environment. Property values have historically been increasing in an inflationary environment as increasing prices for labour, material and land make real estate developments economically less viable without a proportionate increase in rental levels or sales prices. THis may result in the decrease of new property supply, which in turn allows the existing property owners to increase both prices as well as occupancy levels.
At the same time, long-term investments in cash-flow properties are open to the risks arising from the increase of interest rates – as debt financing becomes more expensive, the equity returns would probably suffer (at least in the short term).
Doing nothing and waiting until the government manages to get the inflation under control is probably the worst action plan today. Investing is likely to produce better returns than simply leaving savings sitting in cash. Every investor should take active steps to protect their hard-earned savings from inflation and rebalance their portfolio to assets that perform well in the inflationary environment.
