Inflation Busters: Trades that investors can think about to beat sky-high inflation rates
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Inflation erodes the value of money, but there are ways to retain, or even increase some of your capital.
Obviously there isn’t one silver bullet investment strategy to beat inflation, but these assets are known to weather the storm better than others, and are often called inflation-beating assets.
Gold is considered a hedge against inflation because it can normally hold its value in times of economic uncertainty.
When inflation rises, the purchasing power of fiat currency decreases, and people lose confidence in fiat and may look for alternative assets that can retain their value.
And unlike fiat currency, gold has a finite supply, and that scarcity makes gold valuable.
Commodity prices can be a leading indicator of inflation, as they are often an input cost for many goods and services.
Commodities that could retain or increase in value when inflation rises include grain, precious metals, electricity, agriculture, oil, and natural gas.
Commodity prices also tend to respond to changes in the US dollar’s relative strength.
REITs (or Real Estate Investment Trusts) are funds that invest in a variety of real estate assets, such as office buildings, shopping centres, apartment complexes, and hotels.
For retail investors, it’s a cheap way to get into commercial properties as they are often too expensive to buy outright.
REITs generate rental income from those properties, which is then distributed to shareholders in the form of dividends.
REITs are considered good investments in an inflationary period because real estate is seen as a safe and stable investment, and people tend to buy them to preserve their wealth.
Rent and property prices also usually adjust upwards along with inflation rates, countering the effect of inflation itself.
There are other ways to beat inflation such as investing in individual stocks. For example, coal stocks are known to have high dividend yields.
On the ASX, Yancoal (ASX:YAN) delivered a 22% annual dividend yield, which easily beat the current inflation rate of 7%.
While this is well and good, investors still carry the downside risk when holding those stocks.
There is apparently a way to lock in your returns while protecting that downside risk, according to the co-founder of Stropro, Anto Joseph.
A former private banker at Citi, Joseph said that Stropro is an alternative investments platform that provides investment strategies that will not only enhance returns, but also minimise downside risks.
As an example of the kind of deals he’s put together for clients, Joseph explained that Aussies invest in the Big Four (or Big Five including Macquarie) for dividend income.
“But if you look at banks over a 10-year cycle, they end up going back to the same price as they were 10 years ago,” Joseph told Stockhead.
“So what we designed at Stropro was an investment product linked to the Big Four, but it provides you protection of up to a 35% to 40% fall in those stocks, and a guaranteed yield of 8-9% per annum.”
Joseph explained that the strategy is constructed by buying deeply discounted zero coupon bonds, combined with put options on the bank stocks (to protect the downside).
Income from the deeply discounted zero bonds is being used in conjunction with the put option premium, totalling a yield of 8-9% per annum.
“This is one of our straight forward vanilla strategies, but it gives you a flavour of the defined outcome that investors often look for,” Joseph said.
Quick author’s note: We all know that in finance there is no free lunch, so this strategy would only work if the investor held the product to maturity, in order to avoid the daily market-to-market fluctuations.
Another similar product that can be done on Stropro is a downside protection trade for 11 ASX20 companies, with a minimum guaranteed yield of 8%.
Joseph said he first arranged this investment for a financial advisor in Perth called David who had limited knowledge of structured products, proving that these products are friendly enough even for those who are just getting started.
What David wanted to do, according to Joseph, was to make sure that if the market fell 30% or more for those 11 stocks, that he would still have all of his capital left to buy them at a significant discount.
“So we’ve put five products together targeting those 11 ASX20 companies, and we gave him an 8% fixed yield, as well as protecting him up to a 30% fall across those ASX 20 companies.
“If any of those companies sold off more than 30%, he had the option to buy any of those companies at 70% of their initial price.
“In other words, if he bought the shares at 100 bucks, and instead of losing 30%, he had the option to buy them at 70% of its initial value when the market falls,” Joseph said.
When asked why an investor couldn’t just do this trade themselves by putting together a combination of stocks and listed options on the ASX, Joseph said it all boils down to costs.
“An investor would likely not be able to get the same pricing that an institutional trading desk would.
“This is because the construction of the strategy uses a bit of the balance sheet of the investment bank, as well as an option,” explained Joseph.
Just a note that investors willing to trade with Stropro will have to prove that they either have $250k in annual income, or $2.5m in assets.
However, Stropro says it has reduced the minimum amount to enter into these products to just $20,000, which is a much lower entry point than a similar product at a private bank.
The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.
Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.