History has shown that equities remain the best buffer against inflation, says Old Mutual Investment Group

Ninety years of investment data reveal that staying invested in growth assets like equities is key to long-term wealth creation.

With concerns around the implications of rising inflation continuing to climb, the consequence of sizable policy stimulus and Russia’s invasion of Ukraine may have ushered in a period of significant turbulence, characterised by high-interest rates. But as investors look to protect their assets within this volatile environment, history has shown that equities remain the best hedge against inflation, while staying invested and holding a balanced portfolio with sizable exposure to growth assets are critical for preserving wealth in the long term.

This is according to Graham Tucker, Portfolio Manager at Old Mutual Investment Group, who said, “staying invested in equities over the long term remains the best driver of growth – presenting an effective buffer against the corrosive influence of inflation.”

Presenting the 9th Edition of Old Mutual Investment Group’s Long Term Perspectives Report – a review that provides a thorough analysis of the investment performance of several asset classes, including cash and equities, over more than ninety year – Tucker highlighted the consistent outperformance of equities over the long term despite facing periods of high inflation and interest rates.

“While global geopolitics have certainly augmented current interest rate hikes, a strong United States economy with equally strong wage growth is the underlying driver.

“Putting aside who the culprits are and whether the United States Federal Reserve was hiking interest rates fast or high enough, the key
takeaway from the historical evidence shows that cash is certainly not king in the long term,” said Tucker.

Not all equities are equal

The Dow Jones Industrial Average recently posted its most significant loss since 2020 after retailers warned of rising cost pressures, confirming investors’ worst fears over rising inflation. Yet, while equities can provide a buffer against inflation over the longer term, Urvesh Desai, Portfolio Manager at Old Mutual Investment Group, warned that in high interest and inflation environments, not all equities are created equal.

Value stocks tend to perform better than growth stocks in high inflation periods, while growth stocks perform better during low inflation periods. “When selecting equities as inflation hedges, companies able to pass inflation costs on to consumers present the best investment options. In addition, selecting stocks with lower price-earnings ratios is key,” said Desai.

“Counters that aren’t heavily exposed to the current macro-cycle – providing services or products that continue to show growth or generate cash through volatility – should be sought out.”

On the other hand, he said, companies carrying a lot of debt should be avoided, as these present a challenge in high inflation and interest rate environments.

“That said, counters that have benefitted from the current low-interest rate and inflation environments should be reviewed, especially if they were also amongst the beneficiaries of the COVID-19 windfall,” he adds.

The inflationary outlook for South Africa

While inflation is rampant in other parts of the world, Old Mutual Investment Group doesn’t believe South Africa is entering a period of runaway inflation and interest rates locally.

“South Africa lacks a strong economy that can often act as a secondary driver of inflation,” said Desai.

“On the global front, unlike the stagflation of the 70s, we’re confident that the United States Federal Reserve has the experience and monetary policy tools and successfully rein in inflation.”

The role of a balanced portfolio

Tucker points out that since equities don’t come without risk, bonds and other assets, like gold, should always be considered when creating a blended portfolio to provide smoother returns.

“For example, in South Africa high current bond yields available on South African bonds should provide good future real returns for investors,” concludes Tucker.

“This targeted, risk-managed, blending of equity, bond and other growth asset strategies, remain the best hedge against wealth erosion and loss of buying power in the current high inflation and interest rate environment in the long term.”