Preparing a portfolio to beat inflation

Investing can be difficult during periods of high inflation. Whether high or low, inflation inevitably has an impact on actual investment returns, although investors generally consider it the enemy. Investment avoidance can be seen as a risk because the real value of money decreases when inflation rises. Investors should strategically select assets for different levels of inflation to generate returns that outperform inflation.

In the past year, inflation has risen sharply, leading to significant increases in the price of goods and the cost of living. High inflation also affects the economy as the capital market fluctuates. Investors should consider the causes of rising inflation and anticipate''future trends. According to economists, inflation has risen sharply worldwide as demand for goods and services soared after being suppressed during the pandemic, while manufacturing, transportation and labor markets have been unable to meet rising demand since the pandemic. While global inflation has slowed, the labor market remains tight and consumption has risen strongly amid the partial economic recovery, economists said. The sharp rise in oil prices, now approaching the $100 a barrel level, means inflation will remain high in the near term. Investors need to analyze and reflect on how inflation affects various assets.

Head and founder of Lief Capital Asset Management Fongthorn Tavontanakul''recently shared his thoughts on assets that can outperform inflation in an uncertain economic environment.

He has an opinion on the prospects for investing in stocks, debt instruments, real estate investment trusts (REITs), commodities and gold.

Some people turn to reliable dividend stocks when inflation is high. When Kenneth R French Data Library studied returns on investments in U.S. stocks from 1947 through 2021, actual returns varied by inflation rate. During periods when inflation was between 0 and 5%, the real return after inflation was 0.90% per month or 12% per year. When inflation was between 5 and 10%, the real return was 0.40% per month. When inflation exceeded 10%, the real return was approximately 0.10% per''month. "If inflation is low, you should invest in growth stocks in areas such as technology, innovation or luxury goods because low financing costs allow companies to lower interest costs," Mr. Fongthorn said. On the flip side, if inflation is high, you should invest in safe stocks (defensive or high-dividend stocks) such as necessities, hospitals, infrastructure and utilities because they are necessities that everyone needs, he said. Mr. Fongthorn advises investing in safe stocks when inflation is high.

According to statistics from Allianz Global Investors for the period 1971 to 2021, when inflation in the US is between 2 and 8%, government bonds and debt instruments with maturities'Bonds with maturities of less than one year yielded annualized returns of 2 to 3%, while bonds with maturities of 1 to 5 years yielded approximately 8 to 13% per year. Investment grade corporate grade bonds with investment grade ratings yielded approximately 6 to 8% per annum. Investing in short-term debt instruments that don't provide high yields can result in low real returns after inflation is deducted or even negative returns, even after inflation slows, Mr. Fongthorn said. When the policy interest rate falls, yields on debt instruments typically rise, he said. ''Indexed bonds are an interesting option because the interest rate varies with inflation,'' Mr. Fongthorn said.''''Interest expense (coupon) consists of the effective interest rate, which is fixed, and interest expense, which depends on the rate of inflation at that time. In addition, the principal is protected from inflation, so it retains the same purchasing power, which will increase as inflation rises, while the interest expense will increase or decrease depending on the rate of inflation and is paid as a percentage of the principal, which is constantly rising. Thus, when inflation rises, interest costs also rise. "

Data from the FTSE Nareit All Equity REITs Index for the period 1972 to 2021 showed that, with inflation below 2.5%, the return on REIT investments was approximately 10% per annum in terms of market returns and''dividends. When inflation was between 2.5% and 7.0%, the yield was 16% per year, and when inflation was over 7%, the yield was 13% per year. While REIT yields have been attractive in the past, the real estate sector has yet to recover, resulting in unsustainable returns, he said. That means this type of investment has not done well against inflation, Mr. Fongthorn said. "The poor performance is linked to concerns that the economy is likely to slow down. Also, the trend of working from home has continued since the pandemic," he said. "This makes REITs suitable only for those who can afford relatively high risk and long-term investments.

This segment represents a group of assets, not just gold or oil. Natural resources have been''one of the drivers of rising inflation. Historical data show a consistent relationship between inflation and prices in this asset group over the relevant period, Mr. Fongthorn said. If investors want to diversify the risk in their commodity portfolio, he said, they might consider a combination of 50% gold, which through a supply-limiting mechanism helps prevent the effects of inflation. The remaining resources could be in the form of oil or industrial metals. This portfolio combination can provide annual returns of up to 9% and help manage volatility in the overall portfolio, Mr. Fongthorn said. Investors should not invest 100% in commodities because they are highly volatile, he said. Only 5% of an investment portfolio''should constitute commodities, Mr. Fongthorn said. Inflation is considered a direct factor affecting the price of gold. When inflation is high, gold prices tend to rise, while the opposite is true when inflation falls. Data from Bloomberg showed that from January 1971 through December 2022, the average annual return from gold was 7.78%. This is well above the average annual inflation rate in the U.S. during that period, which was 3.7%. In years when there was an economic crisis, gold produced positive returns. For example, gold yielded 24% during the Internet company crisis in 2001, 60% during the sub-prime crisis in 2008, and 7% during the pandemic in 2020. YLG Bullion International CEO Pawan Navavattanasub said the domestic price of gold recently''set a new record of 33,050 baht per baht-weight. Although the global gold market is quite stable, the domestic gold price has risen this year due to the depreciation of the baht by about 6 percent, she said. If the baht weakens to 37 to the U.S. dollar, there is a possibility of exceeding the 33,250 baht mark, Ms. Pawan said. "Gold has a chance to set a new record and rise sharply in both the short and long term when the US Federal Reserve starts cutting interest rates," she said. As for advice on investing in domestic gold during this period, Ms. Pawan said investors can speculate in the range of 32,250-33,450 baht and when gold prices in the global market are not too volatile. However, the weakening of the baht in''The near term will continue because the Fed will not be able to maintain high interest rates for a long time as it could affect small businesses and the banking sector, she said. "By the first quarter of next year, the Fed is expected to start cutting interest rates again," Ms. Pavan said.

Analysis from Siam Commercial Bank notes that when inflation rises, the best option is to invest in gold as it is an asset that has its own value and is considered a good protection against inflation. Some people avoid investing in gold because while it is easy to buy, it can be awkward to sell. Also, some people do not want to hold physical gold because of the difficulty of keeping it safe''storage.

Investing in stocks involves risk because they can be volatile. In many cases, investors will suffer losses if they do not invest cautiously. Investors are advised to choose safe stocks during periods of high inflation, especially those that offer high dividend yields. Information on high-dividend stocks can be found on the website of the Stock Exchange of Thailand (SET), which compiles such information based on data collected over the past five years. Div