Hey Kiwis! These Sectors Can Help You Beat Higher Inflation

Tuesday, 8 February 2022, 4:36 pm
Press Release: Kalkine

Summary

• Inflation reached a 30-year high in 2021, recording its highest level since June 1990.
• It seems imperative for investors to cautiously invest in areas that can help them beat high inflation.
• Investors can turn to different market segments during the inflationary scenario, which can offer some level of stability and are not highly sensitive to inflation.

High inflation has become a long-standing problem in countries across the globe, including New Zealand, during the pandemic era. Supply chain disruptions and rebounding demand have together created heightened inflationary pressures in the economy, riding high on the back of massive stimulus measures. Amidst rising inflationary concerns, investors are somehow concerned for their investments, which might take a hit if consumer prices continue to mount.

As per Stats NZ, the inflation rate in New Zealand hit a 30-year high of 5.9% in 2021, reaching its highest level since June 1990. The uptick in annual inflation was driven by the red-hot property market and fuel price hikes, pushing consumer prices higher.

Although the observed price rise was in line with global inflationary pressures and largely an expected occurrence, experts continue to speculate what it means for the economy. Concerns loom that sky-high inflation may prompt a more aggressive path of cash rate tightening this year from the central bank.

Notably, some level of inflation is always present in the economy and is deemed normal. However, high inflationary pressures urge consumers to spend less, curtailing economic growth to some extent. Meanwhile, rising inflation eventually increases the cost of borrowing for consumers and businesses, hitting some investments harder.

In the given inflationary scenario, it seems imperative for investors to cautiously invest in areas that can help them beat inflation. Investors may choose to invest in sectors that are not highly sensitive to inflation and provide them with some stability even in the current uncertain scenario.

GOOD READ: NZ Inflation at a record high, what should RBNZ do?

Here is a list of some sectors that can aid investors to secure their deposits against red-hot inflation:

Commodity

Commodity stocks tend to perform well during inflationary times as companies engaged in their production and sale often see booming revenues. It is worth noting that commodity-linked stocks are well tied to the market prices of commodities. Essentially, this means that any change in the market prices of metals and minerals is usually reflected in the related commodity stocks instantaneously.

At a time when prices of fuels and a few metals are going haywire, investors can ponder on investing in companies engaged in the production of such commodities to conquer inflation. Gold stocks may also turn out to be safe bets for investors in the current highly volatile environment. Investors may also explore Exchange Traded Funds (or ETFs) for gold, copper, and steel miners to knock high inflation.

Real Estate

Real estate is possibly one of the highly active sectors in New Zealand in terms of price movement. Property prices have surged at a fast pace in the country, making ownership of a house a distant reality for some. However, those looking to invest in the sector can capitalise on this ongoing boom.

Historical data shows that real estate-based investments generally perform well during inflationary times. Investors may also choose Real Estate Investment Trusts (or REITs) to actively trade in the property sector. Such REITs help investors hedge against inflation through the pass-through of price rises in housing prices and rental contracts. However, investors can steer clear of mortgage REITs, as loans of any kind become more expensive during high inflation.

IT and innovation-led sectors

Sectors having a promising outlook in terms of innovation and the generation of new income streams can also be good bets during an inflationary scenario. In the present context, any innovation that can offer lucrative returns in the future can be a good opportunity for investors.

Generally, IT and related sectors offer higher profits to companies in the future. Since inflation is a forward-looking phenomenon, investors can ponder on investing in tech companies whose bulk of cash flows are anticipated to arrive in the distant future. However, it is worth noting that high inflation often leads to high-interest rates, reducing the attractiveness of expensive tech stocks.

Financials

Perhaps a more conflicting choice in one’s portfolio can be financial stocks. Inflation is generally not well taken by banks as it can reduce the existing value of loans that would be repaid to banks in the future. Meanwhile, rising consumer prices are often accompanied by an increase in bond yields.

However, it is worth noting that financial indices continued to perform well last year despite inflationary fears building in the background. Meanwhile, as already mentioned, high inflation usually results in a high cash rate, which works in favour of financial stocks.

In a nutshell, an inflationary scenario is generally considered non-ideal for risk-taking ventures. Thus, it seems to be the right time for investors to reevaluate their portfolios and cautiously choose stocks that offer some level of security. It appears important for investors to conduct proper fundamental and technical research and assess the prospects before adding any stock in their kitty.

GOOD READ: Are global markets headed towards a crash in 2022?

© Scoop Media