In times of high inflation, what should you invest in? – Business

Political crisis followed by economic crisis seems to be a recurring theme in Pakistan.

Add global geopolitical volatility, the commodity super-cycle plus double-digit inflation into the mix, and things get a little complicated.

With gasoline prices rising, inflation is set to continue its upward trajectory after hitting a two-year high of 13.4 percent in April.

In such a scenario, the question on everyone’s mind is: What asset classes to invest in, and how?

If there is one fact that is inalienable at the moment, it is that your savings will continue to lose value due to inflation, which makes it necessary to invest at least any surplus money in risk-free instruments.

In this world, there is no such thing as risk-free, but the closest thing that can be risk-free is the borrowing undertaken by the government for different periods of time, be it three months or twenty years.

Read: how to invest

government bonds

If the government borrows for a year or less, it borrows against what is called a ‘Treasury bond’.

If the government borrows for more than a year, it often borrows against the so-called “Pakistan Investment Bonds”.

In both cases, the government undertakes to pay a “margin” on the money it borrows from the people or other investors.

To be further clarified, no matter what money you put in your bank account, it is estimated that banks invest roughly 55 percent of that money in Treasuries or bonds, where you get a much higher return than you get as a depositor.

Given this, it makes no sense to use the bank as an intermediary, when you can lend directly to the government.

But how does one do that?

This can be done by opening an Investor Portfolio Services account with your bank. At first, the bank may refuse or make excuses, but if you insist, they will open it.

Once opened, you can direct the bank to invest in Treasury bills or bonds. Due to high inflation and correspondingly high interest rates, it is quite possible to lock in interest rates above 13% per annum for different periods of time.

Given how things are going, it may be possible to secure a higher rate. In general, interest rates follow a cycle: they reach a peak and each top follows a bottom. Locking interest rates at or near the peak allows the investor to maximize income.

This is a complicated issue, and for the sake of clarity, I’ve tried to keep it simple. However, we may expand on that in the future.

National Savings Plan

Similarly, people can also invest in the government’s national savings plan. With interest rates rising, the next few months will provide an ideal opportunity to secure a high interest rate for a period of up to ten years.

In fact, regardless of the direction of interest rates in the future, you will be able to fix a certain rate and profit from it. If you are a senior citizen, it is highly recommended to invest in a Behbood Savings Certificate from the National Savings Program for the best fixed income returns, which are also tax deductible.

Likewise, if you are a pensioner, you can open a retiree benefits account, which has similar rates, and is also tax-exempt. It is very important for seniors to manage their risks, and allocate their available money to risk-free and government-backed schemes, rather than deceiving banks and other charlatans.

Speaking of charlatans, if anyone tries to sell you a bank insurance product, which is often your favorite bank, or someone calls you, run away. The product is structured in such a way that it causes nothing but misery and nothing else.

Although achieving a peak, or near the peak rate of, fixed income is a nice conservative goal, the real money should be made in the stock market, or commonly referred to as the stock market.

Read: How developing a culture of investing in stocks can save the Pakistani economy

Stock market

During crises, or successive crises as in our unusual case, stocks of highly profitable and growth-oriented companies are available at a significant discount to their previous prices. What does that actually mean?

Buying shares of a company, in effect, makes you a partial owner of the company among many others, but you are nonetheless the owner. As the entity’s profitability increases, and its ability to generate enough free cash, the expectation is that the value of your inventory will also increase.

The expectation of this value, also called the price, is driven by buyers and sellers of shares in the stock market. In times of crisis, the price of profitable entities may not be affected significantly by slowdown or economic downturn, which provides an opportunity to buy the same shares at cheaper prices. The economic crisis provides such an opportunity; However, one needs to be careful, not to be tempted by falling knives.

Crisis or crisis is the time for exposure in the stock market. Instead of investing in one go, it is better to set up a plan to purchase on a monthly basis, so that one can calculate the average cost.

Creating a monthly investment scheme allows for focus to be avoided, allows it to capture better rates in case the prices continue to drop and so on. Currently, many stocks on the local stock exchange are at a 10-year low in terms of valuation, and are ready for growth once the economy gets back on track. This path is highly recommended if you are young and have a high risk tolerance. If you are about to retire, or have already retired, your exposure to the stock market should be kept to a minimum.

But what specific stocks does one invest in? For starters, avoid anything your broker recommends. Do your own research. It’s your hard-earned money after all.

Unfortunately, we don’t have any professional financial advisors, and no matter how many they are, they are charlatans – so choose your advisors carefully. If that’s too difficult, invest in a mutual fund that invests in stocks. Once you get used to it, you can always invest directly in the stock market.

Although the simplest thing to do now is to buy US dollars, the supply of which is already restricted in the market. Why should people suffer because of constantly bad economic policies? The country has largely failed to ensure that the value of the PKR is maintained, or to provide an environment conducive to sustainable and large-scale economic growth.

These are tough times, but the recurrence of these challenges has made the challenges permanent. The crisis provides an opportunity to position one’s portfolio for long-term growth but this needs to be supported by sound economic policy. One hopes that some common sense will prevail, and that better policy-making will replace the ad hoc interventions that have kept us in a state of perpetual crisis.


The writer is an economist.

Leave a Comment