Using Stocks to Protect your Portfolio against Inflation

Have you noticed that things are costing more nowadays? Common goods like lumber, gasoline, auto parts, and grocery items such as bread and vegetables have seen prices rise this year as a result of rising inflation. Inflation tracks the rise in the price of goods and services. Higher prices for fuel, electricity and food items drove much of this increase in inflation. The inflation rate in Jamaica, or the rate at which prices are increasing, was at 6.1% in August; its highest in six years, and businesses are expecting it to continue climbing even higher over the next three quarters.

What should an investor do when there is an upsurge in inflation? Often, it means adjusting investment portfolios to protect assets against rising prices and an uncertain economy.

The Impact of Inflation on Your Portfolio
Should you be concerned about inflation and your investments? If you have a significant portion of your investments in fixed income securities, then you should definitely be concerned.

When inflation rises, consumer prices rise with it. When prices are increasing, your money will purchase less goods and services. This is especially so for retirees or persons who invest mostly in fixed income. You pay more for less, so retirees on a fixed income suffer when their nest eggs buy less each passing year. For this reason, financial advisors generally caution to keep some portion of your assets in the stock market, to safeguard against inflation.

Stocks that offer protection against Inflation
Stocks, as mentioned earlier, tend to beat inflation even though their growth might be slowed. With that said, investors can choose to ballast their portfolio against inflation by buying individual stocks or buying units in pooled equity funds such as unit trusts or mutual funds.
While some companies can react to inflation by raising their prices, others which compete in the global market may find it difficult to stay competitive with foreign producers that do not have to raise prices due to inflation. On the other hand, some stocks can perform well in periods of high inflation and for these companies, rising prices contribute to higher revenues, which help to boost the price of a company’s stock.

Since inflation increases the cost of inputs, businesses with less reliance on raw materials could be expected to perform better than businesses with cost-intensive products. Therefore, some of the best businesses to invest in during periods of inflation include technology and certain consumer goods that are not highly susceptible to price increases. Banks stocks which are interest rate sensitive, also tend to benefit from rising interest rates as their interest income from loans usually improve when interest rates rise.

Blue-chip stocks, that is stocks of well established companies, may also perform better than growth stocks during inflationary periods, especially if they carry less debt since any increase in interest rates will increase operating costs for a company that relies on debt to grow its business.

However, when used as a hedge against inflation, stocks may be even more effective at protecting your portfolio when your investments are diversified with other classes of investments such as real estate, commodities such as gold and silver and fixed rate securities that are indexed to inflation. As usual, we recommend that you discuss your goals with a licensed financial advisor who is knowledgeable and qualified to help you in creating your financial plan.

If you need advice in building a diversified stock portfolio, FHC Investments Limited can guide you in achieving your financial goals. Feel free to give us a call today.

The following are the current Government of Jamaica bond prices as at October 01, 2021:

*All rates quoted are opening indicative levels in the international capital markets and are subject to change based on market conditions.

The Jamaican dollar appreciated by $0.23 relative to the US dollar week-over-week, moving from a selling rate of $147.77 on Friday, September 24th to $147.54 on Friday, October 01st. The closing BOJ weighted average selling rates are as follows:

The following are the average Treasury bill rates:

Jamaica Stock Market

Movement of the JSE Indices

This week’s Market activity resulted from trading in 112 stocks, of which 68 advanced, 38 declined and 6 traded firm. Market volume amounted 115,810,169 units valued at over J$5,908,680,678.88.

FHCIL’s STOCK PICKS

This information should not be relied upon by the reader as Research or investment advice. If you need advice in building a diversified stock portfolio, FHC Investments Limited can guide you in achieving your financial goals. Feel free to give us a call today.