Are stocks and properties an inflation hedge?

Are stocks and properties an inflation hedge?

 

THE Manpower Ministry’s labour market report for the first quarter reveals that employees in manufacturing, transport and administrative jobs saw their real wages shrink, compared with the same period last year. Their pay increases did not quite match the 6.6 per cent inflation rate. On average, real earnings grew 3.6 per cent compared to the same three-month period last year. However, with annual inflation forecast at 6 per cent this year, a labour economist says it is a matter of time before real earnings dip for workers in other sectors.

 

This, of course, is not good news for working adults who, in addition to having to meet their current financial obligations, also have to save and plan for their children’s education as well as their own retirement. With neither pay rises nor bank deposit rates adequate to cover inflation, and with the financial and property markets still fraught with uncertainties, there would appear to be few safe investment options.

 

In normal circumstances, most people would want to maximise returns. However, in the current climate, many may want to change their risk preferences. Instead of maximising returns, the preferred objective may be to minimise risk.

 

Even so, it is worth remembering that over the long term, equities and properties are the best hedge against inflation. Between 1975 and 2007, the Consumer Price Index (CPI) in Singapore rose 187 per cent. The Straits Times Index (as calculated by Thomson Financial Datastream) climbed 1,159 per cent, while the Urban Redevelopment Authority’s property price index increased 1,334 per cent. Over the same 32-year period, Singapore’s gross domestic product expanded 914 per cent.

 

However, the key phrase to note here is ‘over the long term’.

 

Of course, in the case of equities and properties, which are prone to big swings in prices, the returns one gets will depend a lot on one’s entry level. Investors entering at the wrong point in the cycle would be in for a rough ride. Out of the 28 rolling five-year holding periods in the last 32 years, the STI’s returns lagged the CPI in eight of those periods. Property prices rose less than general prices in 10 periods. But if the holding period is increased to 10 years, stocks failed to keep up with inflation in only three out of the 23 rolling ten-year periods between 1975 and 2007. For property, it was four. But for holding periods of 15 years and above, both properties and equities comfortably beat inflation for all the holding periods. Moreover, returns on properties exceeded those on equities.

 

So for any investor who takes the long view – that is, 15 years or more – current market conditions should not be a deterrent to meeting long-term financial goals.

 

Source: Business Times

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One Response

  1. […] Are stocks and properties an inflation hedge? With neither pay rises nor bank deposit rates adequate to cover inflation, and with the financial and property markets still fraught with uncertainties, there would appear to be few safe investment options. … […]

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