Energy stocks were the best performing sectors in years of high inflation, and remain an excellent income-producing investment. You can also consider investing in share-based real estate. These strategies will protect your money against inflation. And you can also profit from the high-yielding bank loans that are available in the market.
Investing in commodities with low elasticity of demand
Inflation is a factor that erodes the purchasing power of money over time, and the recent rise in inflation rates has made many investors look for ways to protect themselves from future declines. The good news is that there are a number of commodities that have been proven to be solid inflation hedges.
Commodities have a physical dimension, and most investors do not directly invest in them. They are, however, available through commodity-related stocks, ETFs, and other indirect means. By owning these assets, investors can reap the benefits of their increasing value.
Commodity prices are often driven by a number of factors, including a tightening of commodity markets, a shortage of labour, and government stimulus. While some of these factors are temporary, others are long-lasting and can result in a spike in prices.
Commodities are often viewed as an inflation hedge, but they are not without risk. They can outpace household income, market gains, and even Social Security cost-of-living adjustments. Nonetheless, inflation fears are a genuine concern in today’s financial markets. In addition to the benefits of commodities, investors should consider real estate as an inflation-proof investment. Real estate prices will generally rise with the Consumer Price Index (CPI), and landlords will be able to increase rent every year. Investors may also opt to invest in real estate investment trusts, which pool the capital of multiple investors and pay dividends. Investors should note that real estate investment trusts must pay property taxes.
Commodity prices can be volatile, and some commodity exporters have already strengthened their policy frameworks to cope with the potential downswing. While others should take advantage of the current strong prices to reduce debt levels, strengthen institutions, and build fiscal buffers.
Investing in high-yield bank loans
High-yield bank loans (HYBLs) are leveraged loans that periodically reset to market rates. These rates are heavily correlated with inflation. HYBLs are typically issued by companies with credit ratings below investment grade. These companies are required to pledge adequate collateral to back the loans.
Bank loans also offer a low correlation to other asset classes, which makes them a good source of diversification. While most asset classes are negatively impacted by rising rates and declining corporate credit conditions, bank loans are directly benefited by both trends. Furthermore, their position within the capital structure protects them from the selling pressure of other asset classes.
Inflation is also a concern, as rising interest rates can make it more difficult for heavily indebted companies to roll over debt. Moreover, increasing input costs can hurt company fundamentals, resulting in lower earnings. This could negatively impact the company’s leverage ratios and lead to a downgrade in its credit rating.