How to build an inflation-proof portfolio

If there is one thing that consumers, investors, companies, and governments fear alike, it is inflation. As it goes out of control, it can become the greatest value destroyers of all. Inflation is the phenomenon where prices rise and money's worth declines. As inflation soars, long-term investing can end up being a fruitless exercise. While it is clear that in an inflationary environment, bonds do poorly, the link between inflation and equity returns is not so straightforward.

A number of experts propound investing in equities as a certain way of beating inflation. When inflation rises, equities also rise because a company's revenue or asset value would go up, along with inflation. However, this theory is only partially true as a lot actually depends on companies' ability to pass on the cost of inflation to consumers and in ensuring that there is no demand destruction. Historical evidence is mixed with some periods of inflation showing corporate earnings growth while in others earnings suffered.

While high inflation is not new to India, it is now becoming a more global phenomenon. In India, the Reserve Bank of India has already raised policy rates eight times in the past 12 months in its efforts to rein in inflation, which continues to stay above the central bank's comfort level. Experts expect the RBI to hike its repo and reverse repo rates by another 50-75 basis points before inflation can be tackled in the real sense. Looking at commodity prices, particularly crude oil, global outlook on inflation doesn't appear too benign for the near future.

It is also argued that it is not inflation per se that impacts corporate earnings growth, but tightening of money supply that follows. India has already done it and all over the world, be it China, Europe, or the US, we see central banks talking of interest rate hikes. Against this background, it makes sense for retail investors to look for ways to make their portfolios inflation-proof.

Source: www.economictimes.indiatimes.com

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Maulik Doshi

DENIP Consultants Pvt. Ltd.