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, for instance, inflation reached a 15-year height of 20.5% in August 2022, reflecting a passthrough from global inflation dynamics and worsening domestic insecurity.
These pressures have not only strained consumer wallets and pushed more Nigerians below the poverty line but have also eroded 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%. The big question then becomes – How do we hedge against inflation amidst economic uncertainty?
Increasing exposure to stocks: 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.
Diversification: Diversification is a technique that reduces risk by allocating investments across various financial instruments, industries, and other categories. It aims to minimize losses by investing in different areas that would each react differently to the same event. Elile suggests diversifying one’s portfolio to include asset classes that 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 real estate properties.
Be in it for the Long Haul: 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. 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.
Engage Portfolio Managers: Just like every other thing, wealth management also requires expertise. To manage the impact of inflation on investments, seek the advice of a trusted financial advisory firm that will often give tailored investment advisory. Plugging into one of their many available services and trusting their wealth managers will help you hedge against inflation during this period.
In conclusion, wealth management often requires professional guidance from industry-leading 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.
