How to invest in an inflationary environment

[cyclone]

The U.S. CPI surged to a 40-year high, leading to market expectations that the Fed may continue to forward with quicker and larger rate hikes and balance sheet shrinks. Witnessing a falling market for stocks doesn’t have to be about suffering the loss, even though some cash losses may be unavoidable. Instead, investors should always try to see what is presented to them as an opportunity.

Investment Opportunities.
Below are some investment tips for you in the current market environment:

* Keep tabs on inflation-resistant stocks
Look to both offensive and defensive assets: Offensive assets refer to those featuring rising product prices and growing gross margin, while defensive assets refer to those characterized by stable high dividend yields and thus can help offset the pressure of rising interest rates.

* Quality Stocks
A rising market underlines risks, while a falling market brings opportunities. When panic prevails and stock prices fall precipitously, savvy investors attempt to benefit from the rebound via lapping up quality stocks.

* Turn to inflation-related ETFs
As the U.S. inflation surged to a record-high level, many investors are looking to hedge against rising prices, which leads to a soaring demand for investing in inflation-related assets. It's also worth noting that ETFs containing the word "inflation" in their name or description have all witnessed a sharp increase.

* Consider using options to hedge against stock positions
In times of great market volatility, you may encounter a sharp drawdown scenario in the short term if you hold shares of a stock. However, if you are bullish on the stock in the long run, options may help to hedge against your stock positions and secure gains.

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[i4value]

I would like to share the following from my blog article at i4value.asia "Investing in a high inflation environment"

There are 2 aspects of fundamental analysis - company analysis and valuation. Valuation is based on how the company will perform in the future. While we do not have a crystal ball, looking at how a company had performed historically can provide insights into its future.

That is why I believe company analysis and valuation go hand in hand.

The challenge in a high inflation environment is that determining how the company will perform in the future is not so clear. The future is different from the past. This is especially if the company has no history of operating in such a high inflation environment.

This is especially true for most US and ASEAN companies. I don’t think we will end up like Venezuela (2,300 + % inflation in 2020) or Zimbabwe (557 % inflation in 2020). But I am sure we will be looking at high single digits in the coming one or two years.

I hope this article gives you some insights when assessing companies going into such an environment. The main point is that it is not so simple to forecast the impact of high inflation on the value of a company as there are many moving parts.

We don’t know how high the inflation rate will go or how long it will last. Worse still, we do not know what the various counter inflation measures will do to the economy.

That is why I believe that companies with the following characteristics are the ones that will do well in a high inflationary environment:

- High ROE with low capital needs.
- Financially sound.
- A management team with a good track record.