Now, rising inflation is going to present special challenges to investors. Although not as dramatic as a market crash, high inflation is well known to steadily erode portfolio values.

Take for instance, in the past 10 years, investments that yielded below 10.65 per cent (the inflation average from 2005 to 2015), means they lost value.

Put differently, at the same inflation rate per year, the value of a portfolio is cut in half every seven years or so. So, with recent inflation figures starting to inch upwards, investors should be very concerned. In today’s article, I explain two strategies for beating this monster.

First, as alluded in my previous article, investors will do well investing primarily in growth stocks this year. Amongst other reasons, these kind of stocks tend to benefit from inflation.

This class includes energy stocks (KenolKobil), technology stocks (Safaricom), building and construction stocks (Bamburi) and even Real Estate Investment Trusts (Reits) such as the Fahari-Reit.

The later tends to benefit from the inflation hedge: Landlords increase rents to match the cost of living. Since these stocks are likely to rise in price with inflation, they’re great inflation hedges.

Now, before I move to the next point, it is important to note that the above inflation hedgers can only protect a tiny part of the investors’ overall cash flow.

This is because Kenyans save a paltry 14 per cent of their income. Stated differently, Kenyans spend an astonishing 86 per cent of their income.
When one is spending 80 per cent-plus of their income every year, it is difficult to protect oneself against inflation.

This is because investment hedges benefit only the cash one puts in them. For this to work, investors should increase the portion of the income they save.

Secondly, invest in short-term Treasury bills since their rates fluctuate continuously with interest rates and because they automatically adjust upwards as interest rates rise.

Following last month’s increase in inflation, Treasury bill rates have all risen. The 91- 182- 364-day bills stand at 10.85 per cent, 13.16 per cent and 13.8 per cent respectively, up from 10.4 per cent, 12.76 per cent and 13.25 per cent in the same order.

In fact, the worst investment to put money into during periods of inflation, are long-term fixed rate interest-bearing investments such as the long-term treasuries with maturities of 10 years or longer.

This is because long-term fixed income investments lose value when interest rates rise as investors flee the security in favour of higher yielding alternatives.

Having said all that, it’s important for investors to consider that such a repositioning is necessary if indeed high inflation is coming. This is especially true since inflation has been stable for several months.

Moreover, the Central Bank of Kenya has stated that imported inflation could be a cause of concern this year. From an investment standpoint, this means inflation is a risk to be managed and balanced against more obvious forms of risk, such as volatility and loss of principal.