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“BE fearful when others are greedy and greedy when others are fearful,” is a famous quote by billionaire investor Warren Buffett (pic) made more than three decades ago.

This quote is relevant now. Some investors fear the impact of the 40-year record high inflation which is driving up prices of goods and services, and in turn, reducing the purchasing power of consumers.

While some investors may be on selling mode, Buffett has decided to go shopping after sitting on a fortune of US$130bil (RM560.23bil) for years.

Early this month, Buffett’s Berkshire Hathaway disclosed that it had bought almost 121 million shares of HP Inc worth about US$4.2bil (RM18.10bil), raising his stake to more than 11% in the technology company.

Last month, the investing firm run by Buffett also made a huge bet on a major oil company by upping its stake in Occidental Petroleum to nearly 15%, in line with higher crude oil prices.

The firm also announced an agreement to buy insurer Alleghany Corp for more than US$11bil (RM47.40bil).

No doubt, this is the right time to invest. In times of high inflation, it is best to create a diversified portfolio rather than sitting on cash, says financial adviser Yap Ming Hui.

“My advice is to invest in a portfolio which is globally diversified, safe and to hold your investments for the long run.

Yap: It is best to create a diversified portfolio rather than sitting on cash.

Yap: It is best to create a diversified portfolio rather than sitting on cash.

“Do not bet on one sector, as that will be speculative. You may choose to grow your wealth via a diversified portfolio for the longer term. This is not the time to win for the short term due to global uncertainties,” he says.

Yap advises investors to invest in three key sectors – energy, commodities and precious metals.

“Investors can look at sectors related to precious metals like gold or the energy sector, which could be in traditional crude oil or clean energy businesses involved in either upstream or downstream sectors, as these would benefit in the short term.

“Also, the commodities sector such as plantation-related businesses will benefit in the short term amid the high inflation,” explains Yap.

Although the right investment strategy is to invest money in a diversified portfolio, Yap reveals the necessity to allocate at least six months of funds for emergency purposes in these times.

Having said that, he recommends amateur investors to engage fund managers or robo-advisers to grab investment opportunities quickly in the high inflation era.

“As an amateur investor, you won’t be able to see the opportunity or grab the opportunity fast enough, so it is important to use a fund manager or even a robo-adviser to diversify your investments into different areas,” says Yap.

In terms of portfolio strategy, fund manager Danny Wong says a well-diversified portfolio across asset classes including cash, gold, equities and commodities is a must in a market down cycle.

He opines that commodities are the most preferred asset class during rising inflation, followed by equities and treasury inflation protected securities or TIPS for the more risk-averse investor.

Wong, who is chief executive officer of Areca Capital, explains that precious metals such as gold are also a “good hedge” against inflation, particularly when the value of currencies is in doubt due to the overprinting of money.

“Defensive assets like gold tend to make asymmetric returns during rainy days, while commodities tend to trend higher in periods of extreme inflation. Selective stocks are also important to bet as they always rebound fast in tandem with the recovery of economies,” he believes.

It is often said that inflation is bad for stocks, but Wong reckons this is a “myth”, as studies show that equities have benefited during periods of rising inflation.

“This can be partially linked to the strong economic growth often associated with rising inflation.

“Even if strong economic growth is not present, investing in businesses with pricing power is still the best way to protect against inflation, as these businesses will be able to raise prices, and they will be able to protect their margins against erosion by inflationary pressure,” explains Wong.

However, he says that value and small-cap stocks tend to be more economically sensitive, allowing them to benefit from the early- and mid-stages of economic recoveries.

Elaborating further, Wong shares that dividend-paying stocks have the potential to provide yields that outpace inflation, noting that banking stocks are a good example.

“If one were to pick growth stocks, one needs to beware of those growth companies that require high borrowings as higher interest costs could be a huge burden,” he says.

Wong also reckons that real estate investment trusts (REITs) could provide a good hedge against inflation, provided the real estate market that the REIT is involved in is not suffering from an oversupply and depressed yields.

As the risk of stagflation rises with the economic growth trending lower and inflation higher, Wong advises investors to invest in growth stocks, particularly technology stocks, as demand is expected to be sustainable.

“Technology businesses will usually have a stronger pricing power to overcome inflation, while banks will face more tepid loan growth in a stagflation as compared to inflation,” he reveals.

In contrast, what is a bad strategy, given the unnerving effects of inflation?

The worst strategy during this time is to hold cash, as inflation results in the devaluing of currencies, diminishing purchasing power, says Areca’s Wong.

He believes long-term bonds and other fixed-rate savings instruments are also not ideal to protect one against high inflation.

Financial adviser Yap, who has consulted more than 2,000 clients, says his clients are more ready to invest today compared with the pre-pandemic days.

But he describes some individuals as being “fearful” to invest due to the lack of a right mindset and expectations of investment returns.

“You need the right mindset, the right expectation and right strategy to invest for a successful and a profitable investment in these times,” he explains.

Source: The Star,  Zunaira Saieed / April 23, 2022

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