By Palesa Tlholoe
Looking back at 2021, the investment horizon had a thin silver lining below those black Covid clouds that just won’t go away. Most equity portfolios rebounded, which means if you stayed invested, you were compensated for losses endured during the economic downturn in 2020. In fact, some portfolios surpassed their pre-pandemic returns.
Economic activity recovered in the first half of 2021, rising by 7.5% compared to the first half of 2020, but sadly this positive momentum was halted by the public violence in July in the midst of the third wave.
As we ease into 2022, inflation seems to be the biggest threat to local and global markets. Locally, inflation stood at 5% in October 2021 (compared with an average of 3.2% earlier in the year). This was within the South African Reserve Bank’s (SARB’s) monetary policy target range of 3 - 6%. In December, inflation rose to 5.9%, which puts it right at the top of the range. National Treasury projects that real economic growth will be a meagre 1.8% in 2022, and the SARB also recently increased the repo rate by 25 basis points to 3.75%. (Coming off a record low, but still.)
These factors don’t bode well for inflation, which begs the question: How to invest in this year? A focus on inflation-beating returns seems to be the solution…
How does inflation affect investments?
Inflation causes the value of your money to diminish. If you’re invested in cash, like a money market fund or a bank deposit, and the inflation rate remains at around 5%, your investment might not generate significant returns. Cash instruments generally give an annual return of 3 - 6%, which is not inflation-beating enough for a long-term investor.
Ideally, for a medium- to long-term investment, you should be seeking at least 3% above the inflation rate. If your investment requirement is short-term, however, then a cash fund serves its purpose. With an emergency fund, for example, the priorities are stability and easy access to the money, not necessarily beating inflation.
How to inflation-proof your portfolio
The sensible solution for a long-term goal is a multi-asset fund that has some exposure to growth assets. If you have time in the market, a balanced fund makes a lot of sense as it will generally deliver good returns over and above inflation, regardless of whether the inflation rate remains within the target range or goes a bit higher. A balanced fund is a multi-asset fund with a high exposure to equities (shares), along with exposure to other asset classes like property and offshore. Not all balanced funds are the same – some are more aggressive (more heavily weighted towards equities) and some are more conservative. Speak to your Certified Financial Planner (CFP) to find the best long-term fund that suits your risk appetite and portfolio makeup.
Likewise, your CFP will also be able to advise on the best fund for a medium-term investment, where you would typically want less risk and more capital stability. In this case, a multi-asset income fund might be the solution, due to its higher exposure to bonds. Bonds are less volatile than equities, but investing in them should still allow you to comfortably beat inflation.
All the best for 2022 – I hope it’s your best financial year yet!
Palesa Tlholoe, CFP, is Co-Founder and a Wealth Manager at Imvelo Wealth
This article first appeared in the January 2022 issue of IOL MONEY, our free digital magazine, which may be accessed here.