Stock markets have seen a huge correction across the globe this year. Simultaneously, significant inflation spikes have also been witnessed in many parts of the world. A rise in inflation tends to drive monetary authorities to raise interest rates. Increases in interest rates lead to a shift of assets from equity to debt, as the risk-reward ratio changes. As per Kavan Choksi Professional Investor, inflation trading has become all too common in times of rising price inflation or in times when investors expect the Federal Reserve (Fed) to change rates considerably over the coming months. Inflation trade basically implies to an investing strategy or trading method that seeks to profit from rising price levels influenced by inflation or expectations of coming inflation
Kavan Choksi Professional Investor talks about investment strategies to follow during inflation
Inflation trading broadly involves the shifting of portfolio assets, or it may even imply to speculative trades associated with assets highly susceptible to price inflation, such as the dollar, gold, or silver. Stock market trading strategies for inflation often require a unique approach, as rising inflation may significantly impact asset prices and market dynamics. Inflation erodes the real value of money, making it vital for investors to adjust their strategies to protect and grow their wealth.
Fundamental analysis involves the financial analysis of the company and analysis of the industry on which the company is based. It also evaluates the overall performance of the industry as per the macroeconomic situation in the nation. Conversely, technical analysis deals with everyday financial trends, including the performance of the company based on daily uptrends and downtrends in the market. For technical analysis, traders need to closely study a company daily, especially its charts and numbers in the stock market. This data is used by traders to make important predictions about the changes. They largely focus on studying market trends in volume, price, and moving averages.
In times of rising price inflation, investors should focus on rotating their portfolios into assets generally more favorable in an inflationary environment. Here are a few strategies they tend to explore:
- Diversification: Diversification is a fundamental strategy for managing the impact of inflation on a stock portfolio. During times of rising inflation, asset prices may become more volatile. Investing across diverse asset classes like stocks, bonds, real estate, and commodities would help the investors to spread risk and reduce the impact of inflation on the overall portfolio.
- Inflation-resistant stocks: There are certain types of stocks that are likely to perform well during periods of inflation, including cynical stocks and dividend growth stocks. Cynical stocks belong to companies that tend to do well during economic expansions and inflationary periods, including the ones associated with the energy sector. On the other hand, dividend growth stocks belonging to companies with a history of consistently increasing dividends can be attractive during inflation, as they provide a potential hedge against rising prices.
- Real Assets and commodities: Investing in commodities and real estate can act as a hedge against inflation as such assets typically increase in value during inflationary periods.
- Treasury Inflation-Protected Securities (TIPS): TIPS are U.S. government bonds are designed to protect investors from inflation. The principal value of TIPS increases with inflation, which basically means that their interest payments also rise in line with inflation. Such securities can offer a safe haven during inflationary periods. Sophisticated investors and traders may typically make targeted speculative trades by making use of derivative instruments in order to orchestrate inflation trades that seek to capitalize on rising future prices.
As per Kavan Choksi Professional Investor, making investments and trading in an inflationary environment presents both challenges and opportunities. However, following the right approach can help people to navigate the complexities of rising prices and protect their portfolios.