How How How

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.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged foreign exchange trading); Type 4 Regulated Activity (Advising on securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.