Re-positioning your portfolio at a time of mounting inflation


Inflation slows for the first time in 9 months amid CBK rate hikes. PHOTO | POOL

Jim Cramer famously says, “there’s a bull market somewhere” but it now looks he may struggle trying to find one. Year to date, MSCI Frontier markets are down 17 percent (in dollar terms), MSCI Emerging markets, 21.5 percent, MSCI World Index, 14.6 percent and MSCI Kenya Index, 22 percent.

Main cause? Global inflation. It’s obvious this is now the central macro issue the world over. In Kenya, the consumer price index (CPI) data for the month of September will be out today.

But the monthly inflation rate for August was 8.5 percent, up from 8.3 percent in the previous month, representing the highest reading since June of 2017. Similarly, the producer price index (PPI) is above 11 percent, up from lower single digits seen last year according to the Kenya National Bureau of Statistics.

With the known weak transmission mechanism of the Central Bank of Kenya, the big question is; how can investors manage portfolios in an inflationary season? In particular, with near negative (some already showing negative real returns) for major asset classes, are there any inflation-hedge trades?

Inflation makes people unhappy and is spreading widely the world over. On top of this, the US dollar is adding a currency “surcharge” as the Fed simultaneously tightens policy. The dollar is now nearly 15 percent up against a broad basket of currencies.

In Kenya, the local unit has lost some 7 percent against the dollar meaning every commodity priced in the greenback is 7 percent higher in price. Add this increase to another increase due to global scarcities brought about by broken supply chains (as a result of the Russia war) and that’s a double whammy hit of inflation.

These sharp increases in inflation are recessionary and as a result, markets plummet. For foreign investors, who borrowed dollars to invest in higher-yielding frontier markets - a strategy known as the “carry trade” - they’re booking steep losses already.

Kenya Eurobonds have produced sharply negative returns this year - on average lost 400-600 basis points on all Eurobonds.

With inflation expected to stay elevated into 2023, investors should consider re-positioning their investments previously structured for the “low inflation” environment. One; portfolio adjustments should start with fixed income - shift into shorter maturity bills (such as 91- 182 day) that are less sensitive to interest rate swings as long-term yields will likely adjust upwards or remain capped.

Two, maintain and/or raise your exposure in inflation stocks such as energy and agriculture equities (Kakuzi, Sasini and Total). This is not only a defensive play but also an inflation hedge as these names should continue to benefit from higher equilibrium energy and commodity prices globally.

Lastly, gold is eventually going to see some safe-haven trades again. Although its performance is less convincing - it's down some 20 percent from its March highs to date -, it's a proven long-term hedge against inflation.

Unfortunately, this hedge would be an expensive one to execute as the ABSA Gold ETF market is as good as dead. You’ll have to look elsewhere.

The bottom line: this tactical asset allocation is likely to serve well as an inflation hedge basket.

Mwanyasi is MD Canaan Capital