Value preservation in an inflationary environment

CAPITAL preservation is protecting the inflation-adjusted purchasing power of money so that it can still buy the same value of goods and services throughout the holding period as it would have been able to at the start. Preservation of capital has become the most important aspect of any financial plan as inflationary pressures intensify.

According to official figures released by Zimstats; year-on-year inflation for January 2019 was 56,9percent. This means you now need $156,90 to buy the same basket of goods you could have bought with $100 in January 2018.

In other words, $100 today is the equivalent of $63,73 in January 2018. While the government-reported inflation rate may not fully resonate the depletion of the value in that of your own spending habits, the benchmark is calculated based on a basket of goods which is commensurate with that of the majority of the population and includes weightings of subsidised products — some of which may not always be available.

At one time interest rates were relatively synchronised with the rate of inflation. In 2014 interest rates for 30day deposits averaged between 8 percent and 12 percent, today they’re averaging between 1 percent and 4percent.

As the saying goes “Cash is King” and so it is important to maintain a small percentage of your investment fund in a call account to accommodate short term expenses and more importantly — too take advantage of lucrative investment opportunities when they arise. It’s a compromise; in return for liquidity one waives the right to preserve real value.

So, what options are available for providing a safe, legal way to maintain purchasing power?

Investing in the stock market. Despite the hype and frenzy about the stock market in the last quarter of 2018, prices of the major indices are quickly reaching all-time highs in local currency terms. If one’s salary has not increased as quickly as the prices have, the stock market is significantly overvalued.

Operationally, some of the bluechip companies behind the stock market movements are struggling with an increasing cost base and foreign currency shortages. For those who entered the market before June 2018, it’s a good place to be, but for the speculative individuals thinking of entering today there is no guarantee capital will be preserved.

Buying real estate. In the current market with no faith in the currency, almost no property owners are willing to sell unless it is for physical US dollars but this does not stop companies or pension funds from starting their own real estate projects.

Low income houses, staff housing and student accommodation have been a popular start. Regular individuals can participate in this market through Real Estate Investment vehicles offered by asset managers.

Leveraging under-valued assets. One way to rise above the current inflationary malaise is through hedging activities whereby an investor can take advantage of fiscal distortions in the market place.

Whilst more advanced capital markets regulate this activity it is not a readily available investment class here in Zimbabwe. Therefore in providing a simple example of leverage in our local parlance, month on month inflation for January 2019 was 10,75 percent. On average Micro Financiers are offering credit at 6 percent per month.

This means if you had borrowed $100 in December for groceries, those groceries are now worth $110.75 but your repayment to the Micro Financier would be $106. Whilst this example is for illustrative purposes only, from an investment perspective one can take advantage of similar distortions and maintain or preserve value through an alternate investment strategy.

It may take a while for the government’s policies and regulations to restore the economy’s health and protect the currency’s purchasing power. Rather than wondering how long it will take before your recent salary adjustments will feel worthless, visit Zimnat Asset Management to explore wealth solutions that will ensure value preservation of your finances.