How to fight inflation in falling markets How to fight inflation in falling markets How to fight inflation in falling markets

How to fight inflation in falling markets

Søren Otto Simonsen

Senior Investment Editor

Summary:  Volatile markets aren’t the most attractive to invest in, but with surging inflation it is still a (risky) way to preserve the value of your cash.


Inflation – the silent assassin of cash – is raging across the globe. Many countries are experiencing higher inflation than in the past 40 years. For instance, the US inflation for April came in at 8.3% while the European was 7.5%. This is significant, if you compare it to most central banks’ stated goal of inflation at or below 2%. It means that you can buy less with your money- clearly not an ideal situation. If you ask someone in finance how to prevent this, they’ll most likely tell you to invest your money. This is because the returns you get from investing can even out your wealth – i.e., you can keep your purchasing power.

But when you log in to your trading platform, or if you just follow the news, you will notice that the financial markets on a broad scale aren’t doing that well. In fact, they are doing badly: both the American stock index S&P 500 and the European Euro Stoxx 50 are down almost 15% for the year. It seems like a dire situation, but there are still places where you can look to try and preserve your purchasing power. 

We have asked our Head of Equity strategy, Peter Garnry, and our Head of Commodities, Ole Hansen, where one could look to avoid losing to inflation, but without nose diving into falling markets. They supply three ideas to potentially look at and suggest an approach which can help in times like these.

Inflation-linked bonds

“If you want to try and protect your savings against inflation, you could consider investing in inflation-linked bonds. Put shortly, if you invest in e.g., an ETF (Exchange Traded Fund) investing in inflation-linked bonds, then you will get exposure to bonds that will have their principal increased with the consumer price index. This means that the value of the instrument goes up if inflation goes up. Of course, the risk is like that if inflation goes down, the value will too, and higher interest rates will also negatively affect inflation-protected bonds” says Garnry.

Commodities

“Another way to potentially fight inflation can be to invest in broad commodity products. Since commodities are the most basic input to everything we produce, the price of commodities has a relatively strong connection to inflation. For instance, anything from building a house, a new car to the much-needed green transformation will require an abundance of industrial metals from aluminum and copper to lithium and nickel. The prices of these are likely to remain supported despite the risk of an economic downturn” says Hansen.

Gold

“Gold is considered a safe haven within investing. This means that it is a place to look when times get tough. Gold has historically had a relatively strong connection to inflation and is generally believed to be one of the better protections against losing your purchasing power. Previously it was difficult to invest in gold because you needed to buy it, but today there are gold-based products you can trade online. But you need to be aware of the type of product you choose and make sure you understand how it works, including its risks, before diving into it,” says Hansen.

Protect your portfolio by spreading your investments.

Apart from ideas on what to invest in Garnry also offers another thing to consider, including a word of caution. “It is a very tough time for investing, so you need to make sure your risk is under control. Markets are wild these days, so you need to be careful. Generally, it is probably time to revisit what is called your asset allocation. This means the mix of investment assets like stocks, bonds, etc. as it could be time to move some money from equities into other instruments,” Garnry says.

Inflation explained

When we call inflation the silent assassin of cash, it is because that is exactly what it is. Inflation means that prices in society have increased, and this is an important measure for how society – financially – is evolving. But even though it is seen as an important and positive part of the global financial infrastructure today, it is less positive for large cash reserves and savings. Because when prices increase, it means that you can buy less for your savings. 

Let’s look at this example – you have saved up 10,000 USD to buy a new car. The car you want costs 10,000 USD, but you decide to wait a year to have a bit of a buffer. Next year – if inflation is at 8 pct. – the car will cost 10,800 instead, so if you haven’t saved 800 USD dollars more, you can’t afford the car anymore. While 800 dollars in a 10,000-dollar budget might not seem like a lot, the compound price increases over time can be significant. That is why banks in general will recommend that you invest your money, as the potential positive return you might get over time can help you keep your purchasing power.

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