As inflation continues to rise globally, Zambia has not been spared from its economic impacts. For investors, the negative effects posed by inflation are significant, as they can degrade the value of returns and create uncertainty in financial markets. Inflation is currently standing at 13.8% in Zambia, posing a significant challenge for investors seeking to preserve the value of their assets. The relentless rise in prices erodes the purchasing power of money, making it imperative for investors to adopt strategies that outpace inflation. 

The table below shows movement in inflation rate for the past 5 years. The rate ranged between 9.10% in 2019 to the current rate of 13.8%. We saw the rate go to an all-time high in 2021 of 22.02%. The leading factors that cause inflation in Zambia in the short-term are influenced by the depreciation of the Kwacha exchange rate, increases in energy diesel prices and importation of goods.

Here are some effective ways investors can shield themselves against the erosive effects of inflation:

1. Bonds: Investing in bonds can provide a hedge against inflation, especially when yields exceed the inflation rate. With bonds offering returns ranging between 17% and 26.5%, investors can invest in longer term bonds to curb the negative effect of inflation and ensure that their investments grow at a rate higher than the inflation rate, thus preserving their purchasing power. 

2. Real Estate: Real estate has historically been a reliable hedge against inflation. Property prices tend to rise along with inflation, as do rental incomes. Investing directly in property or through real estate investment trusts (REITs) allows investors to benefit from this inflationary protection while potentially generating attractive returns.

3. Stocks and Shares: Despite market volatility, stocks and shares can offer substantial returns over the long term, typically spanning 10 to 15 years. By diversifying your stock portfolio across different industries and riding out market fluctuations, investors can harness the potential of equities outpacing inflation and give you the best chance of securing significant gains. Investors should not react impulsively to short term price fluctuations as they do not reflect company’s long-term prospects. Focus on companies with strong pricing power and the ability to pass on higher costs to consumers, such as those in the consumer staples and energy sectors.

4. Diversification: Diversify your portfolio across different asset classes, sectors, and geographical regions. Investing in assets denominated in different currencies can help mitigate the impact of local currency depreciation. By diversifying internationally, investors can hedge against fluctuations in the Zambian kwacha and safeguard the value of their investments against inflationary pressures.

5. Regular portfolio rebalancing: Regularly rebalance your portfolio to maintain your desired asset allocation and risk profile. This can help ensure that you are not overexposed to any one asset class or sector that may be underperforming. This can be done with the guidance of your investment advisor who will have expert insights in market trends.

6. Manage cash flows: Optimise your cash flows by investing in assets that generate income. Investments that generate regular income streams, such as dividend-paying stocks and fixed-income securities like bonds, can help offset the impact of rising living costs. The income from these investments can potentially keep pace with or outpace inflation, helping to maintain purchasing power.

In conclusion, investors in Zambia can employ various strategies to protect themselves against the adverse effects of inflation. By diversifying their portfolios across different asset classes, investors can effectively safeguard their wealth and ensure long-term financial security. It’s important to note that no investment strategy is risk free, and diversification does not guarantee a profit or protect against losses. Additionally, your investment strategy should be tailored to your specific financial goals and risk tolerance. At Money Acumen Advisory, our team of experts are here to help you develop a comprehensive investment plan that aligns with your objectives and addresses the challenges posed by high inflation.