Classical investment theory would have us believe that equity investment provides protection against the effects of inflation. The theory posits that most companies are able to pass on increases in input costs to their customers and hence improve earnings. Analyzing historic equity returns relative to inflation shows us that this may not always be the case.
Some companies, however, do well at hedging inflation. Commodity prices and inflation typically move in the same direction; hence many commodity companies should benefit from higher prices.
All-in-all, we can see that no single asset class in isolation provides sufficient protection of investors’ purchasing power and that a robust asset allocation and investment process is needed to protect investors against the effects of inflation on their savings.
Figure 1: Core and Headline CPI – SA