The past few months were pretty volatile for the economy of Pakistan and therefore the PKR has depreciated by almost 20 percent against the USD. The country struggles with hefty import prices, decreasing forex reserves, real assets and political instability. Many of us weren’t prepared for this blitzkrieg-style USD rampage and are left in shock and awe. Adding fuel to the fire, the Government of Pakistan levied new taxes on the real estate market, particularly on the plots sector.
So what will it mean for common Pakistani investors? and what do they have to try to attenuate the impact of this inflation and PKR depreciation?
Post-Covid Increase in Global Inflation
The Governments cause inflation as inflation will solely be caused by more cash supply and the easiest way to escape economic crises.
The only approach to bridge the economic cost post covid would be inflation as there would be no acute economic meltdown and instead, there would be long-run inflation spreading the loss of wealth over time across the board. the price of living has not gone up, you only got poorer because the purchasing power of your money went down. Inflation is essentially a tool to regulate to the loss of wealth we’ve all suffered from the Covid hiatus.
Another way to look at this is the rise in demand is fueling this inflation. Driven by food and energy costs in the wake of the COVID-19 pandemic, inflation has been exacerbated by the Russian invasion of Ukraine.
Another way to analyze the situation is to observe the rise in demand. The rising demand also fueled inflation. Driven by food and energy prices in the wake of the COVID-19 pandemic, inflation has been exacerbated by the Russia-Ukraine war.
Many economic gurus believe that this inflation will be consistent throughout 2022 and most of 2023. It’s expected to gradually move towards normalization by 2024.
What is meant by higher inflation?
Higher Inflation indicates the fact that you’ve to pay more for similar services or merchandise because it rises. For a common man’s buying power, this implies your cheque isn’t going as high unless your wages are increasing at the same pace, that has not been the case for many people. However, everyone’s true rate of inflation is totally different as we all consume different services and products.
Investors having stocks of money stashed or invested in areas like Banks, Stocks, Equities, etc which may hardly cope with inflation suggests that they risk losing their buying power in the future.
For instance, let’s say that somebody has ten million at the beginning of 2022 and analyze how his investment can end up against 11% inflation as foreseen in 2022 and 2023 in Pakistan:
Scenario 1: if you have your investment in cash, you have lost 22% of your wealth.
Scenario 2: If you have your investment in a bank, you have lost 2% of your wealth.
Scenario 3: If you’ve your investment in the form of mutual funds, you have gained 6% in 2 years.
Scenario 4: If you’ve your investment in the form of rental real estate, you have gained 18% in 2 years.
This means if, for example, you’ve PKR 100 Lacs in a savings account that pays a 10% interest rate. After a year, you will have 110 Lacs in your account. But if the rate of inflation is running at 11%, you would need PKR 111 Lacs to have the same buying power that you started with. So even with a 10% interest on your savings you are still effectively losing money.
You’ve gained PKR but lost buying power. Any time your savings don’t grow at the same rate as inflation, you will effectively lose money.
USD appreciation fueled inflation
Since the beginning of the current year, USD has appreciated by almost 20% against PKR, this fact has further played a role of catalyst in increasing inflation. The steady devaluation in the current made imports more pricy and the country’s exports more challenging.
It’s a general phenomenon that devaluation always acts as fuel for inflationary factors as import prices got high and demand rises for exports.
Essentially, this indicates that a common man despite having 10% more money, has lost almost 20% of his buying power to what it was back in March 2022.
Can I save my buying power through investment?
While being a victim of inflation, there’s always a choice, either you accept it as a fate or take some effective actions to secure your money from draining.
This is high time for investors and the general public to take action in order to secure your buying power. The drastically increasing inflation demands you to invest effectively to overcome inflation effects.
This is the time to take action if you don’t want to lose your buying power. The sky-high inflation rates demand that you invest them in areas that can effectively beat inflation over the years. Take a look at the inflation rate of Pakistan over the years and its future forecast.
Many investment gurus suggest staying far away from cash amid the skyrocketing inflations. Moreover, stocks are even worst as per experts. The only reliable investment these days are real-return assets.
So what are real return assets?
Real assets are physical assets that have an intrinsic worth due to their substance and properties. Real assets include precious metals, commodities, real estate, land, equipment, and natural resources. They are appropriate for inclusion in most diversified portfolios because of their relatively low correlation with financial assets, such as stocks and bonds.
Simply, if you have to invest in assets that give you a higher return than inflation and taxes, so if inflation is 12% and taxes account for 2%, an asset that would give you a 14% return will be a real return asset.
Not investing in real assets this moment will only end up you losing your purchasing power every passing day.
Real Assets – Way To Go
Real assets are physical assets that have an intrinsic worth due to their substance and properties. Real assets include precious metals, commodities, real estate, land, equipment, and natural resources. They are appropriate for inclusion in most diversified portfolios because of their relatively low correlation with financial assets, such as stocks and bonds.
Remarkably, real assets are usually more stable than financial assets. Inflation, shifts in currency values, and other macroeconomic factors affect real assets less than financial assets. Real assets are particularly well-suited investments during inflationary times because of their tendency to outperform financial assets during such periods.
Real estate and Infrastructure returns have a very positive correlation to inflation, particularly, when it is merged with higher economic growth. Real assets have the tendency of tackling inflation through solid income growth due to higher rent growth, occupancy, and raised demand for essential goods such as electricity and other utilities.