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The latest figures out from the UK yesterday showed that inflation is running at 5.5%. We’ve seen forecasts that show it could run as high as 8% by April. Even if it does return to the target rate of 2% sometime in 2023, it’ll have eroded plenty of value by then from investors portfolios. In the US, it’s much the same picture, albeit within inflation 2% higher than being seen in the UK. With that in mind, here are a few ways we’re looking to offset the erosion.

Targeting dividend payers

Inflation may be rising, but dividend yields have also been rising. We recently wrote about the 20%+ yield of miner Evraz. Even putting this case to one side, there are multiple stocks in the FTSE 100 and FTSE 250 with yields in excess of 8%. 

By picking up the income payouts from these stocks, it helps to directly counteract the erosion from inflation. It’s also a fairly clean way to keep a tab on overall performance, by segregating the income from the capital amount invested in the stock.

The risk here is that even if the income payments offset inflation, a loss could still be generated if the share price nose dives and gets sold for a loss. However, if we look at this from a long-term angle, the risk diminishes somewhat when being flexible on when we would decide to sell.

Selling strangles

Given the volatility we are seeing in equity markets at the moment, Options are showing high premiums. One strategy is a strangle, that seeks to sell a put and call at different strikes for the same expiry date. In the process, you pick up the premium, using this to accumulate over time and offset inflation. 

The risk here is that if we see a large one directional move in the index, the premium can be wiped out (and then some!). For those that have a conviction on direction, out of the money (OTM) options can be sold in the opposite direction. I.e if an investor is bullish on SPX, puts can be sold on the downside, collecting the premium again. To reduce risk, these trades can be placed on individual equities that we already hold. That way, if the option is triggered, we’re ‘covered’ in the sense that we already own the underlying asset.

Using FX carry trades

Moving outside of stocks can also provide some options to help against inflation. For example, the carry trade is a popular case in point from the FX market. This involves selling a low yielding currency and buying one with a higher yield. Within the emerging markets, interest rates of 10%+ can be found.

The thinking here is to tactically buy the high yielding currency and pick up the interest in cash, moving back to the original currency to book profits. Given the volatility in these currency pairs, there’s more opportunity to generate a profit from the FX movement, besides the interest. However, this is also flipped into a risk. For example, the sharp one directional movements seen in the Turkish Lira and Russian Ruble recently highlight that carry trades can go wrong, and so need to be treated carefully.

Crypto Staking

The final way we consider is crypto staking. This has grown in popularity in the past year or so, and is a function that most exchanges allow users to benefit from. In essence, the coins are placed on a time deposit, meaning liquidity is sacrificed from the investor in return for a yield. Even though these tend to be short periods around a one month tenor, high yields can be gained from staking.

Even on relatively stable coins, the staking rewards exceed current inflation. However, we need to be aware that during the staking period, coins cannot be traded without penalties for breaking it. Further, not all coins offer the ability to be staked.

The above mentioned ideas are purely for educational use, and should not be taken as financial advice. Trading, particularly with derivatives and crypto, involves high volatility and potential losses.

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