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Inflation keeps rising, how can you beat the curve as an investor? 

November 21, 2023
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As reported by the National Bureau of Statistics (NBS), the inflation rate has soared to 27.33% as of October 2023, reflecting a 0.61% increase from the previous month. This is more than just a statistical figure; it’s a crucial economic indicator with widespread implications for the country and its people. 

At its core, inflation erodes the purchasing power of a nation’s currency. Inflation is a force that can send ripples through financial markets and impact the purchasing power of currencies. As prices rise, consumers find their money can only buy fewer goods and services. This situation directly affects the daily lives of Nigerians, impacting everything from food to fuel and housing. 

No doubt, a persistently high inflation rate translates into a higher cost of living. Ordinary citizens would find it challenging to maintain their standard of living as essential goods and services become more expensive. This can disproportionately affect low and middle-income households, putting a strain on budgets and lead to a decrease in the overall quality of life. 

The Central Bank often responds to inflation by raising interest rates to curb spending and cool down the economy. While this can be an effective tool to combat inflation, it also means that borrowing becomes more expensive. Individuals and businesses looking to take out loans face higher interest rates, potentially slowing down economic activity. 

As investors, facing such a formidable foe requires strategic thinking, nimble adjustments, and a proactive approach to not only preserve wealth but also capitalise on the shifting tides. 

Forbes in a 2022 article puts it in a positive light saying, “Inflation doesn’t hurt everyone equally. And some even benefit from the rising prices.” The article goes on to list stock investors as one of the biggest winners from high inflation.  

In theory, these rising prices should lead to rising company value. If you are an investor in the stock market, you can take advantage of this rising value. Of course, rising company values don’t occur across all industries. But for many staple consumer goods, like food, company values tend to rise,” Forbes writes. 

One compelling factor about Nigerian economy is the resilience of certain sectors. Despite inflationary pressures, industries such as agriculture, technology, and renewable energy have shown remarkable growth. Investing in these sectors tend to provide hedge against inflation and tap into the nation’s economic potential. 

Understanding the inflation landscape: 

To navigate the complexities of inflation, it’s crucial to grasp its drivers. In Nigeria’s case, factors like supply chain disruptions, currency depreciation, and global economic conditions contribute to the rising tide. Investors need to stay informed about these macroeconomic forces to anticipate their portfolio’s performance. 

Staying informed about global economic trends and their potential impact on Nigeria is crucial. 

Diversification as a shield: 

Diversifying your investment portfolio is like building a sturdy ship to weather a storm. As inflation erodes the purchasing power of the Naira, having a mix of assets, including stocks, bonds, real estate, and commodities, can act as a shield. Each asset class responds differently to inflation, ensuring that even if one sector falls, others may thrive. 

To highlight importance of diversification, Temitope Ogbontolu, Portfolio Manager, Coronation Asset Management says, “Diversifying your investments is like building a robust shield against the erosive effects of inflation. Spread your risk wisely to weather financial storms.” 

Inflation-adjusted investments: 

Consider investments that have historically outpaced inflation. Assets like real estate and commodities tend to hold their value in inflationary periods. 

Embrace equities with caution

While stocks have the potential for high returns, they are not immune to inflationary pressures. However, certain sectors, like consumer staples, utilities, and commodities, often perform well during inflationary periods. A judicious selection of stocks can be a strategic move. 

Spend less than you earn:

This is the most important tip for protecting your wealth during inflation. If you can spend less than you earn, you will have more money to invest. This will help you grow your wealth over time. 

Active management and regular review: 

In a volatile economic environment like Nigeria, a ‘set and forget’ strategy is rarely effective. Regularly review your investment portfolio, adjust allocations based on economic indicators and shifting market conditions. Active management ensures that your investments align with your financial goals. 

As the inflation rate in Nigeria continues to rise, investors face a challenging but navigable journey. The key lies in strategic planning, diversification, and adaptability. By staying informed, embracing diverse assets, and adjusting strategies proactively, investors would not only withstand the inflationary storm but also discover opportunities amid turbulence.   

Temitope adds, “Inflation is a silent thief, eroding the purchasing power of your money. Combat it with the power of long-term investing – where the compounding effect becomes a formidable ally against the relentless march of rising prices.” 

Specific asset classes that can match or beat inflation?   

Equities: Remarkably, the equity market performance (NGX ASI YTD:38.75%) currently outpaces inflation – 27.33%. Investing in well-established and fundamentally strong companies offers growth potential that outpaces inflation over the long term. 

Alternative investments like real estate, commodities and other real assets like gold can act as a hedge against inflation, as their values may rise with increasing prices. 

N.B.: Treasury Bills in Nigeria so far still lag inflation figures (1 year Bill at 20% yield vs inflation at 27.33%). However, we have seen a situation where the Debt Management Office (DMO) and Central Bank of Nigeria (CBN) have begun to aggressively hike rates.  

This week, Monetary Policy Rate (MPR) and auction will determine if we may see a repeat of 2017, where benchmark rates was closed above inflation figures. 

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