Investing To Hedge Against Rising Inflation - ValueWalk Premium

Investing To Hedge Against Rising Inflation

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Q3 2021 hedge fund letters, conferences and more


The past year has been tumultuous for the economy, mostly due to the pandemic. This is most apparent with inflation, which hit its highest point this August, resulting from supply-chain disruptions and unquenched demand. Spending power drops, diminishing hard-earned gains within clients’ portfolios.

However, investors should not be intimidated by high inflation rates. You can invest intelligently and maximize profits during challenging periods. By understanding the characteristics of high-quality companies and industries, investors can put themselves in a position of power rather than vulnerability. Furthermore, investors who focus on diversifying their assets among high-quality companies and industries will maximize returns, even during inflationary periods.

Regular Versus Inflation Investing

Investing during inflation does not need to be avoided, so long as it is thoroughly understood. You must know what your investment goals are before you choose to take on investing during periods of high inflation. You shouldn’t undermine those goals or put your portfolio at risk for minimal gains.

Inflation increases costs and decreases the value of the dollar, so this will affect investments in different ways. When inflation has been ongoing for a lengthy period, the Federal Reserve is likely to increase interest rates, which will affect how companies perform during these periods.

For example, real estate investments tend to do well, as properties will retain value and rental income can increase. Focusing on high-quality companies and industries through inflation will allow you to preserve your portfolio and potentially take advantage of unexpected returns when performed intentionally.

The Characteristics Of Companies To Invest In During Inflation

Start with companies that have a strong business model and market presence. This includes companies with large profit margins, pricing power (to pass price increases on to consumers) and strong operating cash flow growth. These companies will be able to raise prices and still have consumers purchase their goods, keep costs low and continue to manufacture needed goods. Some examples include Apple (AAPL) or Costco (COST), both of which have enough strength to withstand high inflation through high consumer demand, strong pricing power and strong operating cash flows.

A low-levered balance sheet is another key characteristic of companies that are more likely to be inflation-proof. These companies often have strong cash flow, as well as substantial cash on hand with little debt, which tends to occur with more established companies. Startups, on the other hand, are usually highly levered. Often strapped for cash, they are incurring high amounts of debt in an attempt to grow or maintain their businesses. Moreover, they often don’t have the customer loyalty to pass on price increases. Large, established tech companies, such as Google (GOOGL), are good examples of companies that have low-levered balance sheets.

Read the full article here by Bryan Lee, Advisor Perspectives

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