Four strategies to maximise investment returns amid inflation

High-interest savings accounts, government bonds, the stock market and alternative investments are safe bets

Inflation dents the amount of money in your savings account. Getty Images

Inflation is a hot topic around the globe that has politicians, economists and investors worried.

Inflation can be driven when there’s too much money for the number of goods in a country (demand inflation) or when there are supply shortages of a good or service (supply-side drive) such as the increase in natural gas prices following the start of the Russia-Ukraine conflict in 2022.

If you’ve saved up money for a particular investment or retirement (if not, it’s high time you do), you must also be wary of inflation. Not even safer investments like bank savings are immune to these conditions.

How inflation affects your savings

Inflation dents the amount of money in your savings account. For example, if you have Dh1,000 ($272) in your regular savings account at a 1 per cent interest rate, you'll have Dh1,010 in your account the following year.

But in a 2 per cent inflationary environment, you'd need Dh1,020 to retain the same purchasing or “buying power”.

The global headline inflation is 6.8 per cent in 2023, according to the International Monetary Fund. In the Emirates, the UAE Central Bank has projected a fall in inflation to 3.2 per cent by the end of 2023, from 4.8 per cent last year. It expects a further drop to 2.8 per cent by the end of 2024.

So, even if your bank is paying interest, the inflation erodes that increase and makes you poorer. This is exactly why savings accounts are insufficient to tackle an inflationary environment.

Opt for high-interest savings accounts

The easiest way to beat the inflationary environment is to open a high-interest savings account.

Also known as high-yield savings accounts, these offer 10 to 20 times higher interest rates than regular accounts, such as your current account. This higher interest can help you beat inflation and will help you retain buying power.

The interest rate in UAE banks’ savings accounts ranges from 0.2 per cent per annum to 2.4 per cent per year at the maximum. You can earn as much as 4.6 per cent at some banks.

With the increase in UAE Central Bank interest rates, many local and international banks are now offering attractive short-term fixed deposits.

Add government bonds to your portfolio

Bonds are attractive investment options during inflationary periods. Moreover, you can profit from the interest or “coupon” the bonds pay annually or bi-annually.

But bear in mind that not all bonds protect against inflation, especially long-term ones.

Treasury Inflation-Protected Securities (Tips) are a good investment option during inflation. These are indexed to inflation and protect investors from losing purchasing power.

The annual return potential of US and European government bonds is more than it has been in decades.

For example, both US and UK government bonds with a maturity of one to two years are paying in more than 5 per cent per annum (higher than interest rates on a savings account) and European bonds are paying above 4 per cent.

These are excellent options for very low-risk assets in the current climate.

With the central bank interest rates continuing to rise, fixed-income securities remain a good investment option. This includes government bonds, high-yield bonds, Tips and asset-backed securities.

Diversify to stock markets

Diversification is crucial to succeeding with your portfolio. And no asset beats stocks in the long run when properly managed.

The safest way to get into stock investing is through indexes. There are many stock market indexes such as the S&P 500, Dow Jones Industrial Average and Nasdaq Composite, among others.

These indexes are created by top-performing companies. By investing in these indexes, you can participate in the performance of the companies within that index.

Companies provide both dividends to shareholders and the opportunity for price appreciation, all of which are reflected in the index value.

Top-performing companies are affected by inflationary pressures. But because of their strong market fundamentals, they keep generating profits.

For example, the S&P 500’s annual return rate was 28.7 per cent in 2021, while inflation was 4.7 per cent. In 2023 so far, it has returned 17.19 per cent.

Similarly, the Dow and Nasdaq have a rate of return rate of 6.54 per cent and 32.66 per cent, respectively, in 2023.

Explore alternative investments

Several asset classes prove to be inflation-friendly investment options. Commodities like gold and oil top the list.

Since commodity prices tend to rise during inflation, investors can benefit from essential commodities such as petroleum oil and edible oil.

Inflation around the world – in pictures

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  People queue to buy wheat flour at government-controlled prices in Islamabad. Pakistan's economy has been hit hard by a political crisis, as well as devastating floods and the global energy crisis, with the rupee plummeting and inflation at decades-high levels. AFP

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  A market in Rio de Janeiro. Brazil's inflation ended 2022 with a sharp slowdown from double-digit peaks seen throughout the year. Reuters

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  A market in Istanbul. Turkey's inflation at the end of 2022 stood at 64. 27 per cent, the country's Statistical Institute said, while the independent group of inflation researchers ENAG calculated it at 137. 55 per cent. EPA

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  A Walmart in New Jersey. According to a poll, US Republicans and Democrats have distinct views of what’s most important for the government to address amid high inflation. More Republicans name gas and food prices, energy and immigration, while Democrats focus on health care, climate change and poverty. AP

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  A used car sales lot in California. US Federal Reserve officials have indicated it’s possibly too early to declare victory over inflation. AFP

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  A person walks by a sign showing interest rates at a bank in New York. EPA

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  A woman walks with purchases past a store in Berlin. In December, consumer price growth across the Euro zone slowed to 9.2 per cent from 10.1 per cent a month earlier, Eurostat data showed last week. AP

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  Workers sit in front of a banner reading "Stop the Inflation Monster" at the Burchardkai Container Terminal as they go on strike for higher wages at the harbour in Hamburg, Germany. Reuters

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  Price tags at a market in Nice, France. Reuters

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  Commuters cross Waterloo Bridge in London. The British Retail Consortium said spending in store chains rose by 6.9 per cent in annual terms in December, but this was a long way off consumer price inflation, which hit 10.7 per cent in November. Reuters

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  Jobseekers in Johannesburg. South Africa’s governing party wants the central bank’s mandate broadened to shore up the economy and promote employment in addition to its existing task of tackling inflation. Reuters

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  Social grant recipients stand in a queue outside a post office, as joblessness takes its toll in Meadowlands, South Africa. Reuters

Real estate is also a good investment option during inflation. Consider investing in public and private real estate investment trusts in the UAE.

Currently, you have two public REITs in Dubai: Emirates REIT and Nasdaq Dubai. The former has a portfolio market value of $734 million and is continually growing.

Damian Hitchen is chief executive of Saxo Bank Mena