The jaws of inflation

Why inflation-beating returns are the lifeboat you need.
Image: Brad Leue/Barcroft

You’re going to need a bigger boat.’

This line of dialogue from the 1970s blockbuster movie ‘Jaws’ – a story about a Goliath human-hunting shark – was famously delivered by the lead character, upon realising that the size of the creature far exceeded the size of their boat.

Popular culture took this iconic movie line and ran with it, and it soon became a catchphrase of the times; used to signify something that went wrong, or when someone realised that they were vastly out of their depth. Almost half a decade later, this line still holds relevance, and is an apt summation of our present economic landscape. 

Navigating uncertain economic waters

In terms of the global market recovery, the last few months might someday make for a great movie plot.

Off the back of an encouraging Budget Speech where an unexpected windfall – courtesy of a commodity boom – had created some wiggle room, South Africa began to creep towards a post-Covid economic recovery. Yet the ink had barely dried on the Finance Minister’s speech, when the Russian invasion of Ukraine was announced, throwing the world’s markets into turmoil.

Surprisingly, the global markets, and especially the South African market, were very resilient during the initial days of the crisis. Unlike most global socio-economic crises, we did not see a significant flight from risky markets and asset classes. The rand, as well as the bond market, also held its ground surprisingly well.

A week after the invasion, we started to see significant volatility in local and global markets, especially driven by shares that have direct operations in Russia or Ukraine. The expectation is that this conflict will further exacerbate the global inflation risks, which could result in more aggressive interest rate increases and a rise in inflation.

The sharp bite of inflation

Inflation is the nemesis of investments, and in terms of retirement savings, looking at a well-diversified portfolio that offers inflation-beating returns is paramount. “This is necessary to outperform inflation over the long-term, ensuring that value is created over time to sustain future income needs at retirement.”

To this end, Consult follows an outcome-based philosophy and its Consult Select portfolios are aligned with the investment strategy of its clients’ goals, which are linked to inflation targeted outcomes over a specific term. “We are currently marginally overweight in local equities and bonds and marginally underweight in global bonds – a result of well-diversified portfolios and fund manager selection. As a result, we have marginal indirect exposure to Russia, which should not have any meaningful impact on our portfolios.”

I advise you stick with the financial plan that your advisor has developed with you.

“There will always be periods of stress in financial markets, but these same periods of stress also create investment opportunities. In March 2020, we saw one of the most significant sell-offs in financial markets off the back of the pandemic. One of the worst decisions a portfolio manager could have made at this time was to de-risk portfolios due to fears and poor market sentiment. Not only would investors have realised their losses, but they would have also missed out on the phenomenal recovery we have seen in the markets since then. This would have severely impacted the likelihood of achieving your financial goals.”

To reach your destination, you’ll need a solid vessel to see you through, as while it’s smooth sailing at times, at other times the waters are tumultuous. The worst thing that you can do is to jump ship; you need to sit tight and wait out the storm. Eventually, the waters will calm.

Sonja Steyn is head Of Wealth Management Strategy, Private Wealth & Business Management at Consult by Momentum.

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