OPINION: Potential Areas to Invest During this Period of Inflation
By Denis Jjuuko
Somebody whose 2022 resolution is to start constructing a house asked me last week whether she should commence or not. She already has a plot of land in greater Kampala. So far, she has saved about Shs40 million, she said, but the price of cement has increased by at least 14.2% over the last two or so months while some steel bars have gone up by as much as 26.2% for some brands. She wanted to know whether to hold on and build at another time — during a deflation period.
The problem is that nobody can predict with certainty when prices will go back to normal. It may be next week or next year or it may never happen. In Uganda, prices rarely go down. So what does somebody who have cash on them do since the ministry of finance has said that it will “monitor the situation and respond whenever necessary”?
The government says we shouldn’t panic as long as inflation is contained at 5% (currently, they say it is at 3.2%).
Uncertainties, like for this lady, keep people on the edge wondering what they should do with their money. One of my aunts, a seasoned entrepreneur always tells me that “money today is better than money tomorrow” in reference to inflation.
There are businesses and/or investments that withstand inflation and that is where we could be looking. If the lady who asked me keeps her Shs40m kitty in the bank waiting for the right time to start her construction project, the money will most likely lose value. So, what she could do with Shs40m today, may not be able to achieve it at this time next year (money today is better than money tomorrow).
Here we look at businesses and/or investments that one could look at during this period of inflation.
Real estate is one of the businesses that are known to withstand inflation globally because prices always match prevailing conditions. Rent income usually goes up during inflation but so are the values of properties. Because property values are usually rising to match inflation, if your plan was to invest in real estate, this is a good time. As prices of commodities and services go up, so will some people feel the pressure to sell some of their real estate holdings thereby making it a good time to buy. Also, I see many adverts in newspapers of bank foreclosures. But for this to work, you must be a long-term investor.
As prices of commodities (sugar, soap, cooking oil, agricultural products etc.) go up, they provide a good investment opportunity given their ability to beat inflation. An investor can buy at high price and sell at a higher price factoring in inflation. However, this is a business for those who have appetite for high risk because they are the most volatile. Prices of commodities are the best indicators of inflation and therefore prices can crash as fast as they rose signaling an end to an inflation period. Invest with caution.
We are entering the fourth industry revolution (4IR) where technology is disrupting all sorts of industries. Of recent, there is a lot of interest in African tech startups by venture capitalists and this could be an area where to invest during inflation. Like we saw during the Covid-19 lockdowns, technology companies simply grew turning hitherto unknowns like Zoom into global behemoths. The world will continue to rely on technology for almost everything regardless of inflation. Long term investors could take a look at technology businesses.
Short term bonds
If you want to protect your money in the short term and you aren’t into other investments, you may go for bonds as long as they are yielding more than the inflation rate. The short-term ones are better because they give you an option to sit out and monitor the inflation as you make a decision on where to invest. This also protects your money from losing value as you plan where to invest during this period of inflation. But most importantly, if inflation escalates, you can get the money out unlike in long term bonds of for example 15 years and invest it elsewhere.
Uganda’s biggest foreign exchange earner is gold bringing in US$1.7 billion. Many countries hold gold reserves as a hedge against inflation. So since, it seems, there is a lot of gold in Uganda, this is a sector you could invest in. However, in Uganda, you are most likely going to find a conman dealing in gold than anything else. So be cautious on what gold you are buying to avoid buying fake stuff presented as a precious product.
The writer is a communication and visibility consultant