Invest to hedge against inflation
DESPITE the high interest rate and inflationary environment, investors are still being encouraged to seek out viable financial opportunites by investing instead of saving.
Executive director of the Caribbean Policy Research Institute (CaPRI), Damien King and sovereign research analyst at JMMB, Theodore Mitchell gave the advice during the recent JMMB Elevate 4.0 virtual, financial empowerment event.
Both panellists encouraged the audience to reduce their cash holdings and instead invest those funds in stocks, bonds, real estate, alternative investments or the productive sector, to adapt to these existing economic conditions and safeguard their wealth.
Inflation is defined broadly as the rate of increase in the cost of goods and services, whereby high inflation erodes purchasing power. “You [therefore] don’t want to hold on to cash during a high-interest rate environment, you want to be investing,” stated Mitchell. He explained that investing allows investors to regain lost ground and hedge against inflation, while building wealth.
King further noted, “In a high-interest rate period, one must cut back on his/her expenses and become a ‘supplier of interest’.” New investors were encouraged therefore to allocate a portion of their portfolio to debt instruments such as bonds for better returns, while high inflation persists.
A bond is a fixed investment instrument that is used by large companies and governments to finance projects and operations, by essentially borrowing from individuals and repaying those investors at a set rate of return at intervals. This interest payment, which is usually made annually, is known as a coupon payment.
Holding assets in foreign currency (FX) is another viable strategy during these times to diversify one’s portfolio and hedge against inflation. Foreign assets can also be accessed through a variety of overseas-based instruments like unit trusts and mutual funds, offered locally or held directly. “If the local currency is expected to depreciate you want to be in a place where you are actually generating returns from a US-dollar perspective…,” outlined King.
A balancing act must be maintained, cautioned Mitchell in responding to the question of using foreign currency to hedge against inflation and depreciation of the Jamaican dollar. He noted that the hoarding of foreign exchange further drives depreciation of the Jamaican dollar, which is not in the country’s overall best interest.
The final decision on which mix of assets is best (whether stocks, bonds, foreign currency, alternate investments, real estate) will come down to your research and risk tolerance, and admittedly some trial and error to refine your investing game.
The two panellists agreed that Jamaica’s micro and macroeconomic conditions will likely persist for the next 12 to 24 months and as such, all soon-to-be investors and well-thinking financiers — whether amateurs or professionals — should be looking to increase investments to strengthen their position and level up their wealth.