To say this is a hot topic at present would be a huge understatement, with the latest predictions putting inflation at close to 20% for next year. I would normally think that such figures were just sensationalism, or hyperbole, but I’ve learned over the years not to dismiss such things lightly.
If we are looking at this being the case, is there anything we can do to protect ourselves, money wise? Well, yes – sort of, so let’s look at some options.
Index Linked Products
There was a time when National Savings offered all sorts of index-linked products – but these have all but disappeared today. If you are fortunate enough to have NS Certificates, then you’ve been able to roll these amounts over into extended issues – but there have been no new issues for years.
The one exception here is gilts.
Index-linked gilts differ from conventional gilts in that both the semi-annual coupon payments and the principal payment are adjusted in line with movements in the General Index of Retail Prices in the UK (known as the RPI).
Sounds great, right – so where can you buy them?
Well outside of new issues (which are offered by tender from the Debt Management Office), the only way to get hold of gilts is via the secondary market – the prices of which usually will consider market conditions (i.e., inflation is an issue so these will be at a premium).
So, the financially prudent boat has probably all but sailed on these – and if you’re not already on it then the cost of a ticket may not make any sense.
OK – moving away from gilts, what about equities?
Well, normally a lot of equities do well during periods of some inflation, as it increases companies’ profits and swells asset prices – but as you may know, a quick glance at the markets indicates that most of them are down drastically for the year.
But not all – and if you look carefully, you’ll see that some are doing rather well.
Now – I don’t want a show of hands with everyone investing in oil, gas and water – because they’re sort of obvious and will have shares priced at way too high a level – all you are doing here is proving the ‘greater fool theory’ – so avoid.
Instead, here are some sectors for you to consider.
1. Mining
Gold, silver, and diamonds. These sectors almost always beat inflation and work completely outside the normal economic cycle. They also tend to be non-correlated to most conventional sectors. Stocks like Barrick Gold Corp, Endeavor Mining PLC and New Crest Mining Ltd.
2. Infrastructure
Not only roads but also companies that invest in communities such as schools and hospitals (yes, we’re still building them). Funds like the HICL Infrastructure Company cover a wide range of this sector.
3. Big Income/Dividend Companies
Companies that can maintain and even grow dividend payments to investors, despite inflation or other events in the wider economy. Tesco, AstraZenica, Anglo American, 3i Group are just some examples (OK, you can add BP here as well).
4. Financials
The financial sector generally does well when interest rates are going up, and after five consecutive rises since December 2021, the Bank of England has signalled that it will be increasing rates further this year. Think Barclays, NatWest, Standard Chartered, Paragon Banking Group.
So, Equities aside, is there anything else you could consider?
Yes. Property.
Now, whether this is in actual bricks and mortar, or a property fund of some sort (collectives or investment trusts) comes down to your budget and your experience. But, generally speaking, property has been a good hedge against inflation over the years – and most experts think that is likely to continue.
Now, if we’re talking about property then we should at least touch on peer-to-peer lending. This is essentially direct lending of money to individuals and companies and can provide an excellent hedge against inflation. The downside is that the loans tend to be exposed to higher credit risks (due to the people applying for the lending) and there is no FCA or Government protection for the lenders in case of default.
So high risk – but with possibly high rewards.
Conclusion
We’ve talked about a few things here, but the one asset class we haven’t discussed is cash, and the reason for that is that, despite interest rates increasing, it is still a guaranteed way of losing the value of your money over the next 12 months due to…. inflation.