Hedging Against Inflation Amidst Economic Uncertainty

Rising global inflation has been the dominant macroeconomic conversation in 2022, significantly influencing investment decisions. The pressures on global inflation have largely been exacerbated by the impact of the Russia-Ukraine war—and associated sanctions—which have pushed energy and commodity prices to multi-year highs.

In Nigeria, inflation reached a 15-year height of 20.5% in August 2022, reflecting a passthrough from global inflation dynamics and worsening domestic insecurity. Specifically, there have been considerable pressures on food and energy prices. For instance, prices of food items such as vegetable oil, bread and imported rice have risen 21.0% on average in the past year. Likewise, diesel prices have tripled, while gas prices have doubled over the same period. These pressures have strained consumer wallets, increased the cost of living, and invariably pushed more Nigerians below the poverty line.

Another implication of inflation is the erosion of the value of investments. The latest inflation figure suggests that to maintain the value of one’s investment, one would need to earn a return over 20.0%. Although recent interest rate increases by the monetary authorities have helped cushion this inflationary impact, there appears to be an obvious gap to fill to maintain the value of wealth. This concern is further complicated by the consensus expectation for inflation to climb higher in subsequent months.

To manage the impact of inflation on investments, several leading financial institutions like CardinalStone Securities—the trading firm responsible for executing the Titan Trust Bank and Union Bank of Nigeria Plc deal, the largest trade in Nigeria’s capital market history—often advise and assist investors.

Speaking to this, Elile Olutimayin, Managing Director, CardinalStone Securities, believes that increasing exposure to stocks could be one way to add inflation protection to one’s portfolio over time. This is because companies with pricing power can adjust their prices in response to inflation, thus preserving their fundamental value.

Furthermore, she suggests diversifying one’s portfolio to include asset classes which mostly correlate positively with inflation, such as commodities and real estate. For context, with current global inflation largely driven by higher commodity prices, commodity exposures can provide a necessary hedge to investors. Likewise, rentals and lease income tend to increase as inflation rises, as does the value of the real estate properties.

A third consideration, according to Elile, is the need to maintain a long-term view, as it is widely acknowledged that investors have a greater chance of beating inflation over longer horizons. For context, instruments like stocks tend to be more volatile over the short term, increasing their riskiness. Likewise, the relative illiquidity of real estate investments makes a long-term position more appropriate.

In conclusion, wealth management often requires professional guidance from industry practitioners like CardinalStone. The firm offers an array of financial solutions that cut across asset management, securities trading, alternative investments, investment banking, and much more, making them well positioned to support potential and existing clients on their investment journey.