The world economy is being overshadowed by the threat of recession and high inflation spikes that have occurred in various countries. So far, the Indonesian economy is relatively safe based on macroeconomic data until the second quarter of 2022.
Despite the threat of a recession and post-covid-19 pandemic, awareness to invest continues to increase, especially for the people of Indonesia. Based on the experience of the covid pandemic in the past 2 years, people are increasingly aware of the importance of having an emergency fund in the form of investment.
Therefore, the choice of the right investment instrument is the key, so that the funds invested can be a cushion during a crisis. At least there are a number of other asset classes or parts of asset classes that have historically been proven to protect assets whose value has dwindled due to high inflation rates.
Investors are often told when inflation spikes, one of the best decisions is to convert money into physical assets that move above the spike in prices, with real estate being the most often suggested as the best option.
However, physical assets, especially property, are certainly not the choice of many people because they require significant transaction costs, and cannot be purchased as easily or as quickly as other investment assets.
Regarding other investment options, there are also those that are not too expensive but are often volatile and have inconsistent performance during periods of high inflation.
The next best option is usually to rebalance the stock portfolio to move it to an industry that does well in a high-inflation economy.
Here are a number of attractive investment instruments to look at in an economy with high inflation.
In the current situation, when inflation occurs, historically commodity prices usually experience high increases. This is because it takes a long time to build new capacity to meet demand.
For example, shares of listed companies in mining, CPO, oil and gas, and other commodity producers consistently outperform the overall market performance.
Oil and coal prices are up tens to hundreds of percent this year. Meanwhile, mining stocks, especially coal, and oil companies jumped sharply with the energy index being the best sector this year.
While still relatively foreign, commodities can be traded through futures exchanges, the long-term returns of which depend more on the difference between various futures prices than on the underlying commodity.
However, futures trading also poses a special threat as traders know it as contango, which is when the futures price is higher than the expected spot price when the futures contract expires.
Contango means long-term investors are constantly buying high and then selling low, resulting in negative “round” returns.
A number of commodities have experienced significant price increases and are in contango. So investors have to think how big the price increase is enough to cover losses.
In conditions of high inflation or even recession, the stock market as a whole will usually provide negative returns. However, this is not evenly matched, meaning that a number of sectors could experience strengthening and other sectors to be deeply corrected.
A number of common views suggest that investors collect value stocks that have good fundamentals, rather than growth stocks that offer high business growth, such as the technology sector.
In addition, a number of sectors also offer investment opportunities when interest rates are high, including the energy and financial sectors.
High inflation and the recent collapse of the US stock market did not have much effect on gold prices in the first half of this year.
But it’s true that gold has historically performed well when inflation was high, holding on to its value even in countries where inflation soared into the double digits, according to a study for Credit Suisse by academics Elroy Dimson, Paul Marsh and Mike Staunton.
The main problem with gold is that under normal circumstances it tends to underperform than stocks and provide no income. Since the value of gold is underpinned by the notion that others consider it valuable, it is also vulnerable to anything that threatens that status.
After gold rose to near a record in March, its price slumped for three months and suffered its biggest quarterly decline in more than a year.
The pressure on gold looks set to persist in the second half of the year. The Federal Reserve has accelerated interest rate hikes to fight inflation.
That has lifted government bond yields and the US dollar to multi-year highs, dragging gold prices down more than 10% from 2022 highs.
Market volatility, inflation and war are generally expected to increase the price of gold, which is valued for its stability. But investors see the combination of higher yields and a rising dollar as sentiment that could undermine the precious metal’s performance.