Why is it important to diversify your asset classes to keep up with inflation

Renzi Thirumala Head of Investments FNB Wealth and Investments
Renzi Thirumala Head of Investments FNB Wealth and Investments

Global inflation continues to slow, the latest data from the United States showed inflation easing to 6.0%, from 6.4% previously, the slowest pace since September 2021. Weaker global economic activity and easing supply chain pressures should continue to support softer inflation this year.


“Given that household consumption expenditures make up more than 60% of South Africa’s GDP, increasing pressure on households ought to dim growth prospects. Additionally, logistical inefficiencies and local production limitations caused by the availability of energy raise operating and living expenses, weaken confidence, and choke the economy’s potential. Elevated global prices quickly reflected in higher local transportation costs and appeared in local food prices with some lag. Eventually, even prices for items such as clothing and vehicles reflect global pressures,” says Koketso Mano, FNB Senior Economist.


The biggest worry for investors about inflation is that their portfolio returns won’t keep pace with it and that their money will lose value in the market.


“If your money is growing at a rate lower than the general increase in the cost of goods and services, it essentially means that your savings are losing value year after year,” says Renzi Thirumalai, Investments Head for Wealth and Investment at FNB. He argues that investors shouldn’t stop investing or saving out of concern for inflation, but rather focus on their investment objectives and the complementing asset classes that will help to achieve these objectives.


“You must invest with a certain objective in mind. This objective can be to save enough money to pay for your children’s school expenses in a year, to buy a property that you wish to put a down payment on in three years, or to prepare for retirement in twenty years’ time. Inflation will increase the actual cost of your goal over a given period; education costs will reflect some inflationary elements, so will property and retirement expenses,” says Thirumalai.


Investing in asset classes that do not increase with inflation means that you could fall short of your investment goals and are unlikely to reach your objectives. To account for the impact of inflation on your objectives, you need to invest in asset classes whose returns are expected to be above inflation.


Equities, property, and bonds are some of the asset classes to consider as they generally keep pace with inflation over the long term.


Equities – Investors need to look at unit trusts, balanced funds, and equity funds as well as investing in an offshore equity. Since the returns on these asset classes are higher than inflation, the real value of the investment is not diminished by inflation.


Property investment –rentals and consumer price rises are tightly correlated. As a result, real estate investing typically serves as a successful inflation hedge. Rental revenue usually rises each year along with inflation. Since real estate investments track inflation, you can protect your money if you invest in this asset class.


Bonds – Investors must think about bonds in the South African environment because they offer good for returns. The Reserve Bank has also been increasing the repo rate to address the high inflation and slow economic growth. A bond Exchange Traded Fund (ETF) is one of the vehicles investors can look at in this space.


The availability of Exchange Traded Funds (ETFs) in South Africa has made it easy for anyone to become a global investor, or to enhance and diversify their existing investment portfolio across asset types and geographies.


“As an investor you don’t have to time the market and say I’m only going to invest when inflation is low or high. You need to invest throughout market cycles. Continue to invest as investments are a long-term game, and don’t just invest because of inflation or interest rates. A discipline approach is much more important. It is vital to start investing early, stay the course and diversify your investment portfolio,” concludes Thirumalai