What should be your investment strategy if you expect inflation to not just go up a notch but get entirely of control? The word “inflation” strikes fear into the hearts of many Americans worried about a stagnating economy, rising prices, a falling dollar and an income that just can’t keep up with the cost of living. But while a high inflation rate hurts many Americans financially, it also presents opportunities for smart investors who want some high-inflation investments in their portfolio.
Stock investors get some protection from inflation because the same factors that raise the price of goods also raise the values of companies. But coping with high inflation is not easy because of uncertainty – the goal posts and the rules both keep moving.
While some companies can react to inflation by raising their prices, others who compete in a global market may find it difficult to stay competitive with foreign producers who don’t have to raise prices due to inflation. More importantly, inflation robs investors by raising prices with no corresponding increase in value.
Before getting to a few high-inflation stocks, you first need to address your bond portfolio.
Bonds for High Inflation
TIPS are essentially U.S. treasury bonds, but the principal and interest payments adjust to compensate for changes in inflation, providing, for a cost, investors with a potential hedge during inflationary periods.
The iShares Barclay TIPS Bond (TIP), which tracks the Barclays Capital U.S. Treasury Inflation Protected Securities TIPS Index, is the most popular and offers good trading volume.
For international bonds, there is an inflation-protected ETF, the SPDR DB International Government Inflation Protected Bond Fund (WIP). The WIP offers investors a basket of TIP bonds in 18 different countries and 15 different currencies. WIP has 47 different holdings with mostly A-rated and above credit quality. The average life of those bonds is nine years. The biggest market in WIP is France at about 20% of the portfolio followed by the U.K. at about 18% and Canada at nearly 6%. Brazil and Japan make up about 5% each of the portfolio as well.
3 Other High-Inflation Investments
In terms of stocks, since producers and resource companies do relatively well in periods of high inflation, you can obtain currency diversification and perhaps some upside capital appreciation with companies like Australia’s mining giant Broken Hill Properties (BHP). Another favorite of mine that should do well is South Africa’s conglomerate, Anglo-American (AAUK).
Taking a broader shotgun approach brings into play iShares S&P Global Energy (IXC). Exxon Mobil (XOM) is one of the IXC’s larger holdings but in addition to the familiar Chevron (CVX), it also has among its top 10 holdings the French company Total (TOT), Royal Dutch Shell (RDSB), and the United Kingdom-based BP plc (BP).
At this point, I would not go overboard since it is possible that inflation will pull back a bit. All of this just highlights the need to have a diversified portfolio that can weather whatever the economy and market throws at you. Given the environment, these high-inflation investments should help.