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Saving and Investing 19 October 2021

What rising inflation means for your investments

Don’t despair if you’re scratching your head trying to figure out the best response to rising inflation. Investors around the world are in the same boat as they take in the news that prices are climbing after a near decade-long streak of low inflation.

Low inflation may have been bad for savers who rely on interest rates to grow their capital, but at least steady rates meant they were predictable. Prudent investors may therefore have shifted some of their portfolio to higher-growth assets like listed stocks, but they now face the prospect of inflation cheating them out of that growth potential if rising costs eat into future profits.

This presents something of a Catch-22 situation, particularly for cautious investors looking to preserve their wealth for future generations.

As always, it’s best to take a long view on the returns needed to realise your financial goals. As a general rule of thumb, investors aim to achieve average annual returns above inflation to ensure portfolio growth.

Listed stocks are the obvious choice for returns of that order - or above - although this strategy is not without risks. The events of the 2020 are evidence enough of the risks inherent in stock markets.

Post-COVID recovery spurring inflation

Fears about the spread of COVID-19 saw some global markets tumble 30% in March of 2020, followed by a rapid and unexpected recovery. Little more than a year after this upset, many markets had recovered to above pre-pandemic levels.

Investors spooked by this market crash are likely to carry the scars of 2020 for some time. Especially if they exited when markets were at their lowest - effectively locking in their losses - and returned to the market too late to benefit from the strong recovery.

This scenario represented the perfect storm for investment advisors who would have been concerned about clients destroying value by choosing to sell near the market bottom.

They face a similar dilemma now as talk of rising inflation could dampen clients’ interest in listed equities.

This is because the inflation threat for investors is multi-faceted.

On the one hand, share prices could falter on the belief that higher input costs will hurt company profits. This holds true if one believes that the spike in inflation is a long-term trend, not merely a blip in the post-COVID recovery.

Secondly, higher interest rates would increase corporate borrowing costs, and therefore may impact profits.

And lastly, higher prices not only impact investors’ cost of living, but also their ability to achieve their targeted above-inflation returns needed to grow their portfolio.

A balanced approach

The ideal situation is to somehow find a balance between the high-growth potential of listed stocks, but with less of the downside risks caused by market volatility.

This could be achieved through a sufficiently-diversified portfolio invested in some low-risk, interest-bearing assets as well as higher-risk, high-growth equities.

Achieving this happy balance may be investors’ goal, but it’s not always possible to get the right balance in the short term.

Unless, of course, you consider investment solutions that have been specifically designed to offer these benefits out of the box.

A structured product is one such solution that can be designed to offer the best of both worlds to investors who desire this hedging of their risks without complex restructuring of their portfolio.

These specialised investments usually offer a defined investment term, which have better potential for achieving targeted market returns and prevent panic-driven decision-making in times of market turmoil.

Investors tied to a fixed investment term that spanned the COVID-inspired market crash and subsequent recovery would have been especially grateful for this provision in their investment contract.

The exact nature and structure of these investment products differ according to the projections and insights of the investment managers behind the products. However, they tend to offer a mix of interest-bearing assets that could include cash, bonds or money market investments, as well as targeted equity investments.

These investment vehicles are popular with many Standard Bank Wealth International clients who wish to invest for the future whilst managing their risk. This proposition is especially compelling in capital protected Structured Products. This is possible due to the make-up of these products in which your capital is protected against market risks while performance is based on a proportion of the market growth.

Another benefit of many of our Structure Products is that you can choose to invest in pounds sterling, US or Australian dollars.

Best of all, the combination of capital protection and performance based on a proportion of equity market growth can be the perfect mitigant to the rising inflation environment.