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When inflation hits a 31 year high - Where should you invest?

by , 15 February 2022
When inflation hits a 31 year high - Where should you invest?
In December 2021 inflation in the USA rose past 7% for the first time in nearly 40 years.

In the European Union, inflation hit 5% at the same time - by far the highest it has been in 25 years. To give you an idea, the highest inflation has gone in the EU since 2010 was around 2.5%.

And there were actually times inflation was NEGATIVE.

Here in SA, we even hit a four year high.

In a recent Forbes article it said “investors are concerned. Ideas are flying around, yet it is not clear what investors should do if anything.”
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Considering these levels of inflation – what should investors do?
When inflation soars – there’s one investment class you don’t want to be in.
That’s cash.
Simply put – the value of cash in the bank or under the mattress doesn’t increase on its own. Now when there’s deflation, as we had early on in the pandemic, the value of your cash remains steady. And that’s a good thing.
But with sky-high inflation, you are effectively losing out every second you remain in a cash position.
The same goes for fixed interest rate investments – whether it is a fixed deposit or a fixed rate bond. With increasing inflation our interest rates will continue increasing. In that case you don’t want to have a fixed interest rate on a bond or fixed deposit – as your income won’t increase when interest rates go up.
Rather look at inflation linked government bonds, or floating rate bonds – where the interest rate is variable and changes with the national interest rate.
The investments I am eyeing in this high inflation environment
Oil is nearing the $100 level – after starting 2021 around the $50 level per barrel.
We’ve seen this trend in most basic materials as well. The copper price is up 20% in the past 12 months. The price of coal has nearly tripled in the same period. Even though the steel price has eased in the past three months, it is 16% higher than this time last year.
Aluminium is up 47%, Tin is up 86% and Zinc is up 36%.
Simply put – it is clear that commodities are big winners right now.
That’s why I like mining and commodities companies. The link is confusing, but commodities prices go up when inflation is high. And inflation increases because commodities prices go up. In short – investing in the producers of commodities right now, means you beat inflation and profit from higher selling prices.
Here’s my watchlist of five small cap resources companies to keep an eye on in 2022
Inflation buster #1 – Insimbi Industrial
Insimbi is a metals recycling company. Copper is one of its biggest products – hence a 20% higher copper price is sure to see the business pocket bigger profits this year.
When it reported interim results in October 2021, the company saw revenue soar from R2.1 billion to R3.1 billion. Headline earnings per share hit a massive 11.17cps.
The company’s current share price sits around 100c – so you’re buying it at a PE below 10 on half year profits alone. If we annualise these profits the company’s PE ratio is around 4.47. That’s dirt cheap. Its net asset value per share is 141.34cps – meaning you’re getting it at a 29% discount to the value of its underlying assets!
Inflation buster #2 – Wescoal
The price of export coal is around all time highs! That means coal producers are in a great position.
Wescoal is a coal junior, that’s grown production significantly in the past years. Back in June 2016 the company reported full year turnover of R1.6 billion. For the six months ending September 2021, it reported interim revenue at R2.7 billion.
Annualised Wescoal is set to sell more than R5 billion in coal in 2022 – 212% growth on its 2016 figure…
Interim earnings also showed profit per share at 20.69cps – which compares favourably with its 190c share price. If the company repeats first half performance in the second half of the financial year – it will sit on a PE ratio of only 4.59. The company’s net asset value per share is 227c, so it is still selling well below the replacement value of its assets as well.
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Inflation buster #3 – Merafe
Merafe is a ferrochrome producer.
The company, in partnership with Glencore, is one of the world’s largest (and lowest cost) producers of ferrochrome.
The ferrochrome price is currently playing in its favour.
In the first quarter of 2021, ferrochrome sold for 117.5 US cents per pound. By March 2021 the ferrochrome price was 156 US cents a pound. And the first quarter of 2022 saw it get 180 US cents per pound. That’s an increase of 53.2% in the past year.
Even more importantly, 2021 production is up to 379,000 tonnes of ferrochrome, compared to 265,000 tonnes in 2020. So clearly the company is not just getting more for its product, but it is also selling a lot more of it.
In my January issue of Red Hot Penny Shares I identified two more mining companies that are set to coin it big time this year. The first, is at the cusp of securing two of the largest remaining surface deposits of gold left over in South Africa. It is paying a fraction of what these deposits are worth – thanks to their owners being cash strapped. The second company has invested more than R10 billion in building one of the biggest, lowest cost platinum mines in a decade, but its share price puts its market value at only R2.5 billion. The company is in the finishing stages of construction and development, with production starting imminently…
Our editors here at FSPInvest, also collaborated and we narrowed down the five best commodity plays to buy right now… If you’re interested you can get the details here.  But you must hurry, the window is closing quickly on this ‘buying’opportunity!

When inflation hits a 31 year high - Where should you invest?
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