enemy of investment returns as inflation rears its head

Thai investors have heard this phrase for a long time. It is meant to remind investors that the tradeoff of higher returns is higher risks. Higher risks may result in the loss of investment principal, loss of liquidity needed to convert assets into cash, or lowerthanexpected returns.

Nevertheless, there is another longgone investment risk that has recently shown up and begun to affect the investment environment once again: inflation. Inflation is the rise in the general level of prices of goods, which is rapidly surpassing the increase in income. This is a situation that all of us are facing right now.

Many investors may not realise that inflation can cause the value of assets to decline. It is quite difficult to notice the effect of inflation on our investments because the amount of savings in the account still remains the same, earning interest from the bank as usual. The bond we purchased still pays the same returns as scheduled. However, in the inflationary economic environment, the purchasing power of investment will decline.

We may remember that oil prices used to be Bt16 per litre not long ago, but have now hit Bt36. Similarly, the price of pork rose from Bt70 to Bt120 per kilogram. The prices of other goods are expected to increase sooner or later.

Therefore, the most important investment strategy for the next five years is to beat the inflation rate in order to maintain the purchasing power of our investment.

Historically, prior to 1973, inflation in Thailand was only 1.8-2 per cent per year. However, during 19731974, the OPEC cartel started the oil embargo, which resulted in a dramatic fivefold increase in oil prices. During 1979, OPEC raised the price of crude oil by approximately 40 per cent, which resulted in a dramatic surge of inflation worldwide.

In Thailand, during 1974, inflation reached almost 20 per cent, and the imported price index increased by 37 per cent. During 1977 1981, inflationary pressure subsided and inflation came down to 11.5 per cent, while the oneyear deposit rate was 13 per cent. During that same period, inflation in some Latin American countries had reached over 1,000 per cent!

From 1987 onwards, most monetarists believed that inflation was history when the central bank in many countries implemented a targeted monetary policy to seriously battle inflation.

But history always repeats itself. Once again inflationary pressure has returned. The Commerce Ministry announced in May that the inflation rate had reached 7.6 per cent, which is more than double the oneyear deposit rate. If we deducted the oneyear deposit rate by the inflation rate, the real interest rate is negative 4.5 per cent.

Experts believe that the type of inflation that we are facing at the moment is not regular costpush inflation, but rather a structural inflation, which requires a paradigm shift to fully understand this phenomenon.

Any investor who does not yet have a good investment adviser should consider finding one urgently. The effect of inflation on investment will surely remain. Investors should be aware that inflation is an invisible cost of investment.

CHATRAPEE TANTIXALERM is CEO of Ayudhya Fund Management.