Investment Strategy A Hedge Against the Return of Inflation

With no signs of the low-interest phase coming to an end any time soon, rising prices are now aggravating the situation for investors. But there is a way out of the dilemma.
Quelle: Bloomberg
With the oil price picking up, hiking energy prices are the major driver for the rising inflation rate.

The European Central Bank (ECB) is holding fast to its cheap money policy. ECB President Mario Draghi repeatedly said he only wants to hike interest rates once there is a broad economic recovery. Even the rising rate of inflation is not deterring the European central bankers from their course, as prices in Germany rise by 1.7 percent - the strongest uptick since 2013.

“For most savers, higher inflation means large losses in capital and buying power,” said Stephan Buchwald, co-director of Kontora Family Office. The combination of zero interest rate policy and a rise in the rate of price increases is destroying billions in savings. Investors are the group most affected by these developments, as they have parked capital in overnight deposit accounts or put money into fixed-interest investments.

Given the stable economy and rising wages in Germany, signs continue to point to higher prices. Economic experts expect an average inflation rate of 1.6 percent for 2017. But investors can protect themselves from the consequences of inflation.

One possible approach is investment in inflation-indexed bonds, also known as inflation-linked bonds. This special type of government bond only offers mini-interest - some even negative – but in exchange, their coupon is adjusted to the rate of inflation.

These kinds of securities have become increasingly popular. Marc Homsy from investment company Danske Invest, which offers the Global Inflation Linked Bond Fund, speaks of “substantial cash inflows” for about five weeks now. For that reason, the price of these securities has already gone up in the past weeks.

But there is no getting around stocks in the current environment for investors striving for higher yields. Following the motto that dividends are the new interest payment, investors increasingly set their eyes on solid companies that pay out 3 to 4 percent of their share price per year.

Dividend superstars of recent include Coca-Cola, AT&T, Roche, Hennes & Mauritz, ABB and Fresenius. Analyst Bastian Galuschka has calculated that Allianz shareholders have made a near 40-percent profit over the past 10 years thanks to dividend payments, while the stock’s price remained almost unchanged.

For that reason, LBBW funds manager Markus Zeiss now also considers the insurance giant’s securities attractive; like those of carmaker Daimler, which offers a dividend yield of 4.6 percent.

Admittedly, investors must keep the basic differences between a share and a bond in mind. The first catch: With stocks and shares, there is no guarantee of a payout. Contrary to a bond’s coupon, a dividend can be reduced or even completely eliminated. The second catch: Corporations that think in terms of servicing shareholders are more likely to exploit the firm’s corporate substance. “They then often lack the capital for necessary research and development,” Kontora’s Mr. Buchwald said.

The stocks of market leaders with a high degree of pricing power also make sense in times of rising inflation. “Barriers to market entry allow these companies to defend or even improve their above-average return on capital and sales by raising prices,” said Franz Weis, portfolio manager at asset management group Comgest. Such a company could be luxury goods maker Hermès, Swiss construction group Geberit, and Danish world market leader in yogurt and cheese cultures, Chr. Hansen, Mr. Weis said.

Faced with higher rates of price increases and the threat of terrorism and war, many Germans are turning to gold. But while the precious metal may offer good protection against inflation, it is quoted in U.S. dollars and consequently entails the risk of currency fluctuations.


Based on the strong economic and population growth, Asia's infrastructure sector will also profit in the long run. Stefan Häffner, financial consultant

Another alternative in times of stagnating returns are foreign investments, such as funds. Asia’s infrastructure sector, for example, could provide a lucrative opportunity for investors to park their money.

“Based on the strong economic and population growth, as well as the need to catch up in this area, the sector will also profit in the long run,” said financial consultant Stefan Häffner, who is based in Markgröningen, a town in Germany’s southern state of Baden-Württemberg.

The ThomasLloyd Group investment company, for example, has set its sole focus on the Cleantech and infrastructure sector in Asia. With the help of funds, private people have the opportunity to invest alongside large-scale investors, allowing them to put their money in sustainable utilities, such as solar and biomass power stations in countries like the Philippines.

One group hit particularly hard by the ongoing period of low interest rates has been the holders of life insurances. For them, the return of inflation could be good news.

“Provided that the interest rate markets normalize in the wake of rising inflation, safe fixed-interest products could see a real appreciation in value, after deducting for inflation,” said Matthias Altenähr, department head of Market and Rating at insurance group Swiss Life.

Thanks to rising interest rates, insurance companies, who have invested more than 80 percent of their capital in fixed-interest bearing securities, could find greater flexibility. That would have a particularly noticeable effect on retirement plans.


Jürgen Hoffmann writes for Handelsblatt on financial issues. To contact the author: [email protected]