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Highlights
Rising consumer prices can have a significant impact on stock markets.
Investors can plan properly when it comes to protecting their investments.
They can look at investments which give returns more than the prevailing inflation rate.
Rising consumer prices can have a significant impact on stock markets as they impact the rate of return on investments. Surging inflation is generally accompanied by hikes in interest rates, which can make equities less attractive compared to other fixed rate investments.
Talking about bonds, rate hikes by central banks to counter surging consumer prices can lower bond prices. A rise in both rates and yields implies a falling price and a lower principal value for the fixed-income investment.
But investors can plan properly when it comes to protecting their investments. They can look at investments which give returns more than the prevailing inflation rate. In such a scenario, the importance of hedging increases manifold.
Here we discuss three ways to hedge against inflation:
Growth stocks
There are sectors that tend to do well when consumer prices rise. These include the tech sector in particular, along with consumer goods companies. In short, growth stocks can be robust hedges against inflation.
According to some experts, investors can look at shifting 10% of the investment portfolio to stocks from debt during rising inflation. Rising prices are seen to boost profits for these companies, resulting in boosting their share prices.
Diversification
Inflation generally doesn’t initiate same kind of reactions in every stock market across the globe. There is a possibility that while the Australian and Indian markets might react positively to rising prices, the US market might behave in an opposite way and vice versa. So, investors would be better off adding stocks from different markets to hedge their portfolio.
Real estate investment
The realty sector is considered to be a good hedge against inflation as it is an appreciation-oriented asset. Investors can seek exposure to commercial, residential, and industrial assets through real estate investment trusts (REITs). Investors can get higher yields compared to bonds by investing in REITs.
Commodities
Commodities are known to give outsized returns during inflationary times. Other than gold, other popular inflation hedges include energy commodities, such as oil and gas. Commodities generally have intrinsic worth unlike dollar or other currencies.
Investors can also try certain bonds such as Treasury inflation-protected securities (TIPS). These are designed to rise in value to keep pace with inflation.
NOTE: Investors are advised to conduct thorough research before taking any exposure, as sinusoidal market trends are evident.
