The high inflation in the country has converted from a temporary phenomenon into a hyperactive phase. Several experts have raised doubts that there can be a cycle of increases in wages and prices. This has led many people to ask themselves whether they should change their investment strategy for high inflation. They are thinking about shifting a little of their money to asset classes or sectors that have historically done well during periods of inflation. Some others think that the investments should be left alone and the financial markets should control the future fortunes of the portfolio. Everything hinges on how long the high inflation is going to last. It is also to be examined whether we are sitting on a period of increasing inflation. If the economy gets a little overheated, the demand tends to exceed the supply. This causes an increase in the rates of inflation and high inflation forecasts.

Anu Gaggar, CFA, senior investment analyst at Commonwealth Financial Network, said, "Not all equity sectors are created alike. Specifically, some can better combat inflation and subsequent interest rate increases. When inflation is low and rising, as is generally the case during the start of an economic cycle, it is good for equities. High and rising inflation dents consumer sentiment. The market expects that our economy is heading this way, which is what scares investors. Consumer staples also tend to hold their own during an inflationary regime as demand for staples generally tends to be inelastic. [Value stocks] are finally having their day in the sun, and this might last a little longer this time as higher inflation and interest rates may persist."

Threats of High Inflation

The inflation increased by more than eight percent a few months ago. This was the highest mark in the past forty years, measured by the Consumer Price Index. The costs of capital, labor, and materials are growing for firms. Often, the firms cannot pass on the growing costs to the end-users. The corporate margins then go down. The forecasts for lower cash flows in the future are going to cause a further decline in the prices of stocks. Some people think it can lead to a long period of stagflation. There could be lower productivity and wages and an increase in the overall prices. But the experts do not seem to share the same point of view. They think that it is going to be a soft landing for the nation's economy. The inflation is going to be the highest by the middle of the year. They predict that the high inflation will be at moderate levels of under-five percent by next year. This has led many investors to a fix. The last moment when the economy of the nation was in a period of long-term inflation was nearly half a century ago.

Ed Yardeni, president and chief investment strategist at Yardeni Research, said, "[We] have become increasingly concerned that inflation is heading higher for longer. Wages are increasing at a faster pace than they were pre-pandemic, but so are prices, which are offsetting the wage gains. We have become more concerned that productivity isn't rising fast enough to stop the wage-price spiral. The war in Ukraine has heightened the odds of higher-for-longer inflation, tighter-for-longer monetary policy, and recession in the US and Europe." 

High Inflation and Performance in the Financial Markets

Looking at a period of the past year when the inflation was increasing and growing half a century ago, the returns from the financial markets have usually stayed behind and, on average, were negative. The performance of the various sectors also varied during that time. The sectors that performed well during periods of high inflation are the same ones that are doing well now. Tech tends to be a sector that underperforms during this time. Several sectors in the financial markets have seen better performance than the overall financial markets. The energy sector includes gas and oil firms. It is one of the sectors that has done well during high inflation.

Sean Markowicz, a strategist for London-based Schroders Investment Management, said, "In theory, equities should offer a buffer against inflation because a rise in prices should correspond to a rise in nominal revenues and, therefore, boost share prices. Equities, in general, have performed quite poorly in high and rising inflation environments. The revenues of energy stocks are naturally tied to energy prices, a key component of inflation indices. So by definition (they) generally have performed well when inflation rises. Equity REITs (real estate investment trusts) may also help mitigate the impact of rising inflation. Equity REITs own real estate assets and may provide a partial inflation hedge via price increases in rental contracts and property prices. All else being equal, the higher the level of inflation, the greater the discount rate applied to earnings and, therefore, the lower the price-to-earnings ratio investors are prepared to pay "

Energy and Health Sectors Do Well During High Inflation

This is a good investment strategy for high inflation. The energy sector gets some significant volatility when oil prices go down or up. These fluctuations are often seen through the lens of high inflation. Investors can get exposure to the gas and oil shares by parking their money in an ETF. The performance of energy stocks has historically been good during periods of inflation. Similarly, the energy stocks are performing well right now also. These sectors of consumer staples have not performed so well in recent times because of the coronavirus pandemic. But experts say that this sector can also be a great hedge against inflation. The stocks of health care are also predicted to defeat inflation over time. Precious metals and gold are often seen together in the materials sector. They are also seen as a safe investment strategy during periods of high inflation. The benefit of investing in gold is that the price usually increases during periods of inflation because of its dollar denomination. This offset the decrease in the value of the dollar caused by inflation. The issue is that precious metals and gold stocks are quite volatile.

Real Estate Investments

Real estate can also be seen as a practical investment strategy when there is high inflation. The REITs are firms that own and charge real estate that produces income. They should not be seen in the same light as mortgage REITs. These are investments that buy mortgage-backed securities or mortgages. These instruments look to underperform inflation. The instrument makes wealth from the price of rents and property. This usually increases when there is high inflation. The instruments pay out a lot of their gains to the shareholders using dividends to get favorable treatment in taxation.

Kevin Harper, CIO at Almanack Investment Partners, said, "TIPS compensates investors for rises in inflation. The 10-year market expectations for inflation are only marginally higher than they've been for the past 20 and 10 years. So, the market is basically saying everything is going to go back to normal. Investors should own inflation-linked bonds and consider them much more so than nominal because these at least will compensate for unexpected inflation."

Investment Strategy for Financial Stocks During High Inflation

Purchasing shares in the financial markets can also be a great buffer against high inflation. Financial institutions look to benefit from such periods of inflation as long as the central bank increases the rates, which increases the interest that these financial institutions can charge when they give out loans and leads to an increase in their profits. So, the shares of financial institutions perform well when inflation is above average. When looking at the price-to-earnings ratio, such shares were the least expensive sector at the end of the previous year. But the financial sector has seen underperformance recently because the yield curve has seen some inversion. Such an inversion happened when the price of the long-term Treasuries went below the rest of the short-term Treasuries. Experts have seen it as a signal that the country could be entering a phase of recession in the past. Also, financial institutions borrow at the short-term rates and make loans based on the long-term rates.

Conclusion

There are a lot of investment strategies that can be followed during periods of high inflation. Apart from the tips we have given, you can also research and purchase individual shares that are outperforming the financial markets right now. But you should take the necessary precautions to keep track of the shares leading the financial markets right now. You can keep track of commodities, real estate, health care, and oil stocks.