When you were younger, did your parents ever tell you to save your money instead of spending it all?
They mean well, of course.
But also leaves you at the mercy of inflation.
Why?
Simply said, S$100 today is worth less tomorrow — this is where inflation erodes your purchasing power.
What can you do instead?
For starters, we can invest our money and aim for returns that are higher than the inflation rate for that period.
Isn’t investing risky?
Yes, there is no such thing as certainty; you may lose money that you invest.
Then again, think of it this way: the effect of inflation is a certainty; if you don’t invest, the value of your money will decrease.
On the other hand, if you can make the right investing decisions and invest in assets that match your risk appetite, you can grow your wealth even when inflation runs high.
The Mathematics of Inflation
Let’s briefly dabble in the mathematics of inflation.
Imagine a house costs S$100,000 this year and the annual inflation rate is 3%.
At the same time, assume I have S$100,000 in cash, which I choose to save instead of buying the house.
Next year, this house will cost S$103,000, and I will be S$3,000 short.
So, by sitting idly, I would still have my S$100,000 but the real value of this amount just went down by 3% due to inflation.
But what if you invest that money instead?
The mathematics of investing is equally straightforward.
To maintain the real value of my money, my investment return needs to be 3% to negate the 3% inflation rate in the example above.
There are multiple types of inflation rates that we can refer to, but the most relevant is headline inflation.
This measure covers the total inflation rate for all goods and services in an economy (in relation to the CPI).1 For 2024, Singapore’s headline inflation rate was 2.4%, while 2023 and 2022 were much higher at 4.8% and 6.1%, respectively.2
Two main reasons that contributed to these higher rates were the increase of GST and the economy bouncing back from the pandemic.3
However, between 2014 and 2022, the headline rate was mostly below 1%.
Stocks to Beat Inflation
After identifying the inflation rate, let’s look at some stocks that can withstand inflation.
Blue-chip companies: These are the large, established companies that lead their industries with deep pockets. They can absorb rising costs and increase prices without losing many customers because of their strong brand positioning.
What are some examples?
DBS Group (SGX: D05): As a leading bank in Singapore, DBS benefits from higher inflation rates.
Rising inflation drives up interest rates, which increase the spread between what it earns on loans and what it pays on deposits, boosting its overall profitability.
Proctor & Gamble (NYSE: PG): As a globally leading consumer goods producer, P&G is a reliable investment in an inflationary economy.
Staple goods such as home care and personal care tend to have inelastic demand; people will still buy these goods even if prices rise, as they are close to ‘necessities’.
This trend leads to consumer goods stocks performing well regardless of the economic situation.
Dividend Stocks: These are stocks that pay out dividends to shareholders at regular intervals, which act as a predictable income stream.
A great example of dividend stocks are real estate investment trusts (REITs) such as Capitaland Integrated Commercial Trust (SGX: C38U).
CICT owns multiple retail and commercial properties.
Historically, the REIT has been able to increase their rentals during high inflation periods.
Commodity-linked stocks: Commodity-focused firms such as energy or oil firms benefit from inflation, which drives up the cost of their raw materials and hence, asset value.
A big reason for this is that commodity stocks are tied to the real economy.
An example of a stock could be Sembcorp Industries (SGX: U96), which is a beneficiary of energy price volatility.
Diversification matters
Now that we’ve covered some stocks that are candidates to beat inflation, another key lesson is that diversification is key.
In other words, don’t bet on a single sector.
A balanced combination of the three types of stocks covered would be ideal while curating a portfolio.
Another practical strategy that can help is “dollar cost averaging”.4
Which is essentially choosing a fixed sum of money to invest in fixed intervals, rather than trying to time the market in the hunt for short-term profits.
On the flipside, a major mistake is holding too much cash, which is most susceptible to losing value.
Likewise, chasing overly speculative stocks that are outperforming inflation in the short run is risky if they don’t have strong fundamentals.
Sticking to fundamentals and ‘believing’ in the stocks are very important, but do not ignore the idea of rebalancing portfolios during volatile periods.
Get Smart: Inflation is here to stay but so is investing
To reiterate everything covered so far, let me say that inflation is challenging and will never go away, but investing can help protect and grow wealth.
By sticking to business with strong fundamentals and stability in the market, you can put up a good fight against inflation.
Inflation doesn’t have to erode your wealth —with the right strategy, it can sharpen your investing discipline and strengthen your portfolio for the long run.
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Disclosure: Raghav does not own any of the specific stocks listed in the article.
