Much has changed in the world over the past few years.

The global pandemic overturned many of the things that we took for granted – from the cost of shipping goods around the world to simple things like socialising with friends and neighbours.

But as we emerge into a new normal post-lockdowns, the global and domestic economies are still adjusting.

While central banks have had some success in targeting inflation that soared around the world as Covid-related disruption hit supply chains, it is likely that it will settle at a higher level than pre-pandemic.

New Zealand’s rate of inflation as measured by the consumer price index (CPI) peaked at an annual change of 7.3% in the June 2022 quarter.

So, what does that mean for investments?

Equities

Higher rates of inflation are likely to mean higher interest rates overall than would otherwise be the case. That can have an effect on the performance of equities.

While higher inflation can mean better profits for companies, higher interest rates can mean more economic volatility, and depressed growth, as well as weaker consumer confidence and demand for products and services.

Some shares are more inflation-resistant than others – while growth shares tend to be quite sensitive to rising interest rates, companies such as infrastructure and power suppliers are often more resilient. New Zealand’s share market is relatively heavily weighted to these sort of companies, which can sometimes be seen in the divergence in international returns.

Higher interest rates can also affect share prices because investors have other options.

In a world where interest rates are higher, investors have more opportunities to find returns without the level of risk that can come with investing in shares – although it is worth noting that, while inflation remains high, it erodes the real value of the money.

Term deposits

A higher interest rate environment is generally good news for those with money in term deposits, because the interest rates available are higher.

But it can also mean that the rate at which inflation erodes the real value of those investments is higher as well.

It is important to check that the rate of return on deposit and cash investments is enough to stay ahead of inflation. Some investors choose to track the real interest rate being paid, which is the nominal interest rate minus the rate of inflation.

Bonds

When interest rates rise, particularly when rapidly, it can reduce what bonds are worth if they are sold.

This was a problem for some managed funds when the official cash rate started to rise quickly through 2022, because of their need to provide regularly updated valuations, even in situations where the intention was not to immediately sell an asset.

But the amount the bonds pay remains the same, and as they mature, investors can roll on to higher yielding options if rates remain elevated.

Other assets

Some assets, such as real estate and commodities can perform well in a high inflation environment and are sometimes used as an inflation hedge, to offset the impact of inflation on a wider portfolio.

These are usually assets that bring in an income that rises with inflation, or for which the value generally tracks or exceeds the wider rate of inflation.

It is worth noting that in the short term, real estate can be sensitive to movements in interest rates, so it might be worth talking to your adviser to help make informed decisions.

Like to talk?

If you’re wondering how you might expect your investments to perform in a higher inflation environment, or just want to check in your current investment settings and whether they remain appropriate, drop us a line. Our experienced SHARE investment advisers can work with you to determine your desired outcomes and the options to help you get there.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.