19 March 2017

Changes in the global political climate have resulted in increasing uncertainty in trading markets and economies around the world. For investors, this could be either a great time to invest in assets or a better time to protect their net worth. Although positions may vary, the one thing that many economists believe is that inflation is set to rise in the lead up to 2020.

The introduction of value-added tax (VAT) could push the cost of living and doing business within the Gulf Cooperation Council (GCC) region higher. This is because VAT will increase business costs and this will be passed on to the consumer which would, eventually, lead to a rise in prices and therefore result in inflation.

For the United Arab Emirates, inflation rates are projected to reach 2.5 percent by Q4 of 2017 and potentially reach 3.3 percent by 2020. Furthermore, Saudi Arabia is projected to realise a 3.5 percent inflation rate in Q2 of 2017 and forecast to reach 3.1 percent by 2020.

On the other hand, with the adoption by the Bahrain Finance Minister and the Shura Council in Saudi Arabia of the GCC Value Added Tax (VAT) Framework Agreement, greater regional integration and commerce can be expected in 2018 when compliance is set to begin. This has the potential to lower compliance costs and to be highly stimulative, generating new business opportunities throughout the region. 

Given that the economy is set to grow and inflation is forecast to rise it is evident that individuals in the region need to educate themselves on how to protect their wealth in real-terms and make decisions that will enhance the opportunity to achieve financial freedom.

A diversified portfolio will usually help protect any individual from inflation. However, the portfolio needs to be balanced with commodities, stock and currencies that are carefully chosen based on how they react to rising prices.

Gold is the one commodity that everyone should have in their portfolio. Gold is a store of value and when prices rise, so too will the price of gold, thus protecting an individual’s wealth in real-terms.

Certificates of Deposit (COD) are quite popular in this region as people purchase and hold these from local and international banks for a certain period of time in return for interest. Usually speaking, the interest rate is higher than the inflation rate, however in some situations there is risk involved if inflation rises faster than interest rates.

Another form of investment is Treasury Inflation Protected Securities (TIPS) which are quite popular in the West as the principal is always adjusted to account for inflation. For example, if you purchase a $100 TIPS with a 2 percent inflation rate, then the principal amount after adjusting for inflation will now be valued at $102. TIPS are available in many countries and it is advisable to contact a bank and request more information about this kind of security.

In terms of stocks, with the introduction of President Trump’s Manufacturing Council consisting of many C-Level executives from renowned multinational companies, it is worth mentioning that these companies are the forerunners when it comes down to shaping the future of the global manufacturing industry. Some of these companies include: Intel Corporation; Dell Technologies, Ford Motor Company, Johnson & Johnson, General Electric, Tesla, Boeing, Under Armour, 3M and many more

The potential for growth of these companies has significantly increased and by investing in them or perhaps the companies that they collaborate with in the automotive, technology, aviation, fast moving consumer goods (FMCG) industries and more, will certainly contribute to protecting investors from inflation and increase their overall net worth in the long-run.

Lastly, currency trading. Search engines, mobile newsfeeds and push notifications are keeping people at the forefront of what is happening during the age of information. Furthermore, online trading Apps like Xtrade empower investors to make trades in real-time. Global events shape the rise or fall of certain currencies and by being aware of the macro- and micro-economic environments, individuals can make educated decisions on which currencies are on path to inflation and make trades to mitigate the losses incurred from a weakening currency.

Protecting oneself from inflation is not a simple task. It is very complex and involves a plethora of economic, financial and political factors. However, by equipping oneself with the knowledge on options and how to react, the chances to succeed in protecting the real-value of their wealth are in fact, quite high.

Any opinions expressed here are the author’s own.