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“Aftermath of a pandemic, geopolitical tension, inflation, and monetary tightening” label the current turbulent global economy. We have seen unfamiliar inflation levels of above 5 percent across the globe including in the US, EU, UK, and the Gulf countries in the past year. Egypt, like other countries, has fallen into the inflation whirlpool. The current annual core inflation rate (Jan 2023) recorded 31.2 percent; a level not seen in almost 5 years. Inflation, not only an arbitrary index, erodes people’s savings. Therefore, it became crucial for many Egyptians who have the luxury of savings to think of how to preserve their value through investing, and more importantly diversifying investment portfolios. There are different investment channels that might possibly hedge our funds, some of which are: investing in physical commodities, the equity market and all its derivatives, and the money market such as purchasing T-bills and cash deposit certificates.
Commodity prices are gauges of inflation. Commodities are seen as a buffer against inflation due to their intrinsic value, and they often perform well when consumer goods prices rise. According to research by Vanguard, commodities have the largest inflation beta of any asset class studied over the last 30 years, ranging between 6 and 9 denoting that a 1 percent increase in unexpected inflation would result in a 6 percent to 9 percent increase in commodities. In short, a minor but strategic commodities investment can provide an outsized buffer for a portfolio’s overall performance.
When we hear “commodities”, we automatically think of the long-standing haven, gold. However, the opportunity cost of owning gold, in the short term, is large because governments prefer to tighten monetary policy to battle high inflationary pressures meaning rising interest rates, and because gold as a physical asset yields no returns, you would be foregoing another asset that could give a higher return on the short term. Ahmed Nashy, Financial Markets Analyst at Credit Financier Invest (CFI), tells Business Forward, “Gold could be a good hedge in the long term, but not in the short term.”
The Egyptian Commodities Exchange (EGYCOMEX) has not operated yet, so you can either buy physical commodities or opt for investing in an international commodities exchange. According to Asharq Business, quoting the World Gold Council, Egyptians were aware of the precious metals’ worthiness such that Egyptians were among the top 5 nations that increased their gold purchases in 2022 coming second after Russians and succeeded by Iranians, Turkish, and Singaporeans. The purchases of gold coins and bullions increased by 83 percent in 2022 to 4.4 tons, and Egyptians’ purchases of handcrafted jewelry grew by 6 percent last year to 33.6 tons, the highest level since 2015. Gold prices in Egypt hiked to historical levels due to higher demand coinciding with the devaluation of the EGP. According to Gold Bullion, the price of 21-karat gold rose from EGP 1,675 per gram to EGP 1900 during January, but it later declined as Egyptians started shifting their focus to the 25 percent-yield bank certificates announced earlier.
This takes us to another investment channel, which is the money market. The money market includes instruments such as term certificates of deposit, money market mutual funds, and Treasury Bills. As a tool to control inflation, the Egyptian government is opting for reducing the money supply in the market by encouraging people to deposit their money at the banks at high-deposit rates of 16.25 percent. “Given the soaring inflation, certificates of deposits were issued by several public banks (National Bank of Egypt, Banque Misr, Banque Du Caire) with the following interest rates: 22.50 percent 1 year/monthly and 25 percent annually. Other banks like the Arab African International Bank, the Commercial International Bank, and the National Bank of Kuwait are still offering 20 percent 1 year/monthly and 22.50 percent annually. Starting Jan 10, 2023, the Ministry of Finance hiked treasury bills’ yield curve by more than 2 percent to attract foreign (hot money) and domestic investors,” explains Yassmina Abouelhassan, LCY MM Dealer at the Arab African International. T-bills are highly liquid short–term debt instruments issued by CBE on behalf of the MoF issued with maturities of 3, 6, 9, and 12 months.
It is important to understand the difference between real and nominal interest rates. Real interest accounts for inflation depicting the real value of money and purchasing power, while nominal inflation does not. Therefore, it is important to calculate your real return when deciding to invest in a specific certificate. In simple words, for example, if you deposit your money in a bank for a year for a 25 percent return at maturity, and the inflation rate at that time was 20 percent, then your real return would be 5 percent, but if it was lower than the inflation rate, then you would have a negative return. Abouelhassan has further elaborated, “However, the yields still do not reflect the perceived hikes internationally and the current inflation level. Therefore, the 6 months is considered to be the most appealing paper in the market considering annual yields.”
The equity market is another important inflation hedge that proved its credibility over time. We could benefit from the increased tightening monetary policies (aka increasing interest rates) to rein in inflation. The stock market and interest rates do not have a straightforward relationship; stock prices and interest rates are not always inversely proportional. Day traders are impacted differently than investors who like to acquire and hold investments for a long time because the influence varies in the short run and long term. Rather, the historical performance could give a hint. “One channel could be stocks of companies that benefit from inflation, such as energy companies. Even though the S&P500 lost around 20 percent, the energy sector was exceptional gaining around 58 percent during 2022,” Nashy stated.
Wefki Dakroury, Operations Manager at AlMahrousa Stock Brokerage Firm tells us, “As for the Egyptian stock market, the Egyptian Stock Exchange yielded a positive return in 2022 as a result of the high inflation rate, as well as the several currency devaluation decisions during 2022.”, and further explains, “The EGX’s main index increased by nearly 60 percent in 2022. As currency floatation is considered a tool for re-evaluating the assets of companies, it is a major factor in the rise in stock prices. The best sector in the Egyptian Stock Exchange during 2022 was the fertilizer and petrochemical sector achieving the largest price boom as this sector depends on exports, so it is considered a major beneficiary of the devaluation of the local currency. The housing sector was also one of the largest beneficiaries, especially companies that have large land stocks.”
Inflationary pressure amid global turmoil is inevitable; therefore, it is wise to invest our wealth. And as Miguel de Cervantes said in his novel, Don Quixote, “It is the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket”; we need to hedge our wealth against inflation in different channels considering both the short and long term to have the ultimate return.