High Inflation’ is the buzzword we hear these days not just in the UAE and the Middle East but across the world. That is because inflation affects everyone without exception in some way or the other. Its effects are particularly felt in investing and portfolio management. However, we need to understand that inflation is a ‘necessary evil’ and that is why the Central Banks around the world make efforts to tame it but not eliminate it! This understanding is key to stock portfolio management during times of high inflation.


Why Inflation? 

In the simplest terms, an economy prospers through 2 ways – finding new natural resources and increasing human productivity. Just for understanding, let us assume that these are growing at just 2 percent every year. If the amount of money in the system remains the same, then, there will be a 2 percent degrowth in the price of goods and services each year! That will be terrible for the human morale and, in turn, to the economy because increased productivity and innovation is resulting in lower pay! So, there is a definite need to increase the money in the system as well. 

There are different methods to increase the money in the system and we shall not go into those here. But when the increase becomes disproportionately high, we have a scenario where more money is chasing lesser goods and services. This makes the goods and services more expensive and we have high inflation. So, it is a fine balancing act that the Central Banks across the world have to indulge in. That takes time and does not happen instantly. It is here that we need strategic portfolio management to take care of our financial investments. 

Managing Your Portfolio in times of High Inflation 

Inflation is inevitable because it is a necessary evil. Naturally, high inflation also becomes inevitable because the balancing act is not always successful. When that happens, here are 3 dos and 3 don’ts to adhere to for your portfolio risk management. 

Let us begin with the don’ts first. 

  1. Don’t act impulsively

    The compulsion to act is very strong when one hears of high inflation. No action – be it withdrawing funds for booking profits / minimising losses or trying out get-rich-quick schemes – should be done in a knee-jerk manner. Continue to be disciplined and stick to a plan in investing which can be charted out with the help of your ​​Portfolio Management advisor. Professional advice and guidance tends to be rational and non-emotional which is what is needed in such situations.
  2. Don’t invest in thematic funds or loss making companies

    Leverage or debt is a magical instrument that boosts profitability of companies in the good times. But it hits them hard in times of high inflation. While carrying out your stock portfolio management evaluate a company’s financials, especially the debt. In the same vein, you might notice thematic stocks going down. Don’t rush in to buy them. Practice investing only those companies that have the capacity to retain the pricing power for their products or services. These would usually be market leaders and large-cap companies. Though they may not offer very high returns, they definitely provide the stability and cushioning that your portfolio needs.
  3. Don’t run to ‘safety’ of fixed deposits and long-duration funds

    The volatility brought in by high inflation often has people running for cover in the name of portfolio risk management. The temptation to park funds in ‘safe’ fixed deposits and long-term debt instruments gets very strong. However, these very instruments are the most susceptible to rate hikes which are common in times of high inflation. Fixed deposits appear safe with assured returns but the real returns will often turn negative due to the inflationary impact. Real returns are the actual returns after deducting the inflation rate. An FD interest of 4% with inflation at 5% results in a -1% real return.  Fixed deposits are thus only good as emergency funds and not as growth investing options.

And then, here are the dos. 

  1. Diversify your investments

    High inflation affects different asset classes in a different manner. Therefore, achieving the best long term returns at the least risk definitely needs investment diversification across equity, debt, real estate, precious metals etc. Even within a particular asset class, attempt for diversification. In equities, spread the investments across large-cap and mid-cap funds. Similarly in bonds, pick corporate along with the sovereign securities. Seek the advice of your stock portfolio management consultant to ensure that your portfolio is balanced.
  2. Invest in balanced advantage funds

    Another brilliant idea in your strategic portfolio management in times of high inflation is to invest into Balanced Advantage Funds. These funds invest in both – equity and debt – shifting dynamically between them depending on the market conditions and based on a predetermined which is either valuation-based or trend-based. This is very effective in cutting losses and maximising gains. And the dynamic adjustment ensures that you do not have to make efforts to time the market.
  3. Invest in precious metals, especially gold

    Gold is a certain safe haven in times of inflation. It is also highly tradable which makes it an excellent asset to hedge your investments against high inflation. Even in bullion, it makes sense to invest in gold bonds and gold ETFs rather than physical gold as you get greater flexibility and price-transparency. Most importantly, at the time of withdrawal, the gold bonds and gold ETFs offer you the indexation benefits. Having about 5-10% of the investment in gold is an excellent portfolio management strategy.

Investing and managing your portfolio during times of high inflation can get really difficult, but it is definitely not impossible. You need to be aware of the various kinds of investing instruments available to you and how the different ways in which they work to overcome the effects of high inflation. It would be best to avail the services of a professional strategic portfolio management advisor who will keep a close watch on the financial environment and  move your money around as required. 

Ultimately, remember that even times of high inflation will eventually pass.

Asfar Ibrahim - Top Financial Advisor Consultant Dubai UAE, Qatar, Oman and Saudi Arabia

Asfar is an Independent Financial Advisor and Associate Partner with Continental Group based in Dubai, UAE with over 12 years of experience in the region. His clientele includes high networth individuals, corporations, C suite executives, business owners, and entrepreneurs in the region.

Although with proper planning and consistent effort, you can save, invest and distribute your own finances. It is always good to get some professional advice. If you need help in planning your finances in the short, medium, or long term, I can help you do so. You can write to me with your questions and comments to asfar@profinancial.solutions

Take the first step to a better financial life today. Fill out the form to request a call back if you are in Dubai or anywhere in UAE, GCC.