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How to protect yourself from inflation and rising interest rates
The inflation is weighing down the economy and the pockets of consumers. We see it on television, we hear it on the radio, we find it in supermarkets, gas stations, and in conversations with neighbors. Furthermore, to counteract the effects of inflation, central banks in almost the entire world have begun and are raising interest rates. Assuming that what is happening is “how to protect against inflation?”
Fixed Income, the least fixed of the incomes
Funds that invest in both fixed and variable income are experiencing losses these months. Depending on your investment style, there are some exceptions that have managed to be positive, but it has not been the usual. For the most part, the worst part has been taken by the Funds destined for Fixed Income , considered an investment for conservatives.
At this point, it is worth reflecting and thinking about what position we can adopt based on the performance we believe interest rates and bonds will have in the future. There are basically 3 things that can happen:
- May the interest on bonds remain stable. Currently very few analysts consider this scenario. More so, taking into account, for example, that banks like the ECB have already announced that they will reduce the pace of debt purchases.
- Let the interest on bonds and the Euribor go down. A scenario that is still expected to be less possible. Among others, because with inflation rising freely, what is least contemplated is stimulating consumption.
- Let the rate hikes continue. The current scenario that we are seeing and most likely to continue occurring, also contemplated by the majority of analysts.
How to act regarding the performance of Fixed Income according to your forecasts?
If you are one of those who believe that the worst is over, without a doubt the best option would be to buy bonds. Either directly, and/or through a Fixed Income fund that is dedicated to said management. It is not something that recommend, in fact I see very very low rates due to the high level of inflation there is.
On the contrary, if you think that Fixed Income will continue to perform poorly, it would be advisable not to invest or minimize positions from the outset. There is also the possibility of purchasing PUTs referenced to some ETF with exposure to bonds. And of course, there is always the option of buying inflation-linked bonds.
Variable Income, how to protect yourself from inflation with shares
As the cost of raw materials rises, many companies must raise the price of their products or services. This causes the disposable income of consumers to suffer, due to the loss of purchasing power. The companies that usually perform the best are those dealing with basic products in times of uncertainty and inflation. An example, Coca-Cola. Those that perform the worst, the cyclical ones, for example the automobile ones.
Inflation produces resentment in consumption, thus leading to widespread declines in the stock market, in addition to uncertainty over the Russia issue.
Markets may continue to fall. The difficult thing in bearish periods is to anticipate when the falls will end . Therefore, selecting stocks that are considered to be at a good price, or that will perform well, can be a good way to beat inflation with the potential returns they may offer. It should be noted that it is not free of risk, and the selection of securities that each investor can make will greatly determine the performance of each portfolio.
Real estate investments, the most conservative bets
It can be a double-edged sword. Although housing has tended to perform well in inflationary periods, the real estate crisis showed us that prices can drop a lot. If the strength of the euro were to remain, wages were to experience less variation than expected, and price increases continued, an increase in interest rates could drive down property prices. A lack of discouraged buyers would increase the stock of available homes.
In some countries like Germany, alarm bells have already gone off due to the strong increases that housing is experiencing. We must monitor these data, if it is a bubble, with a weak economy, it could affect other countries where the increases have been more moderate, such as Spain.
However, not everything is housing, and there are other properties such as land, premises or parking lots where you can take refuge. They were rented, and there was a possible monetary devaluation, real estate investments would be a good option. And as always, if you do not have the capital available, there are funds, REITs and ETFs in the markets with exposure to this market to benefit from cheaper purchases, or potential future revaluations.
Raw materials, security in how to protect yourself from inflation
If the price that is increasing the most is that of raw materials, why not protect yourself from inflation with them? We can invest through shares of raw material producing companies, ETFs that replicate the behavior of those that may be interesting, or go directly to the derivatives market. One of the favorite assets for many investors or people who want to preserve capital is gold. Beyond combating long-term inflation, there is a direct relationship between periods of uncertainty and gold.
The important thing in these cases is that each person must assume the risks they are willing to take. And of course, you don’t have to put all your eggs in one basket, it has always been interesting to diversify. Source: economiafinanzas
