Investing To Beat Inflation

Equity market remains the most preferred asset class for growth investing. In times of rising prices, the key is to invest in firms and sectors least impacted by inflation.

- Rajiv Ranjan Singh

THE PAST FIVE DECADES witnessed sea changes in the global financial landscape. In the 1970s, Fiat currencies unhinged from the Gold standard. The 1980s initiated the steady decline of sovereign bond yields. The 1990s witnessed the growth, and bursting, of the Internet bubble, while the 2000s saw the great financial crisis that led to quantitative easing with steady decline in interest rates, and the birth of the cryptocurrency ecosystem. Meanwhile, the 2010s prospered on low interest rates, and high sovereign debts.

The pandemic-hit 2020s may, however, be very different. Historic-high inflation is ushering in an era of rising interest rates. It is a challenging phase where high inflation clashes with high interest rates and causes low-growth or stagnant economy — a condition known as stagflation.

The past two decades of low interest rate have made equity markets the preferred asset class for growth investing. Market capitalisation of the BSE, for instance, grew from ₹90,836 crore in 1990-91 to ₹241 lakh crore on May 15, 2022. Hence, a generation of investors has mostly witnessed bull runs of the financial world propped up by benign interest rates. Out of the 9 crore demat accounts in India, only 2.1 crore existed in FY13, and 55% were opened after FY20 (See: Growth in demat accounts). When the bears emerge from hibernation due to anti-inflationary measures, nouveau investors are at risk of fleeing in droves.