Avia Collinder, Gleaner Writer

Samuel Howe, a 38-year-old used-car salesman from St Catherine, is distressed.

The power of money is gone, he grumbled helplessly in an interview with Sunday Business, complaining that not only is his income eroding, his investments on the money market are not as robust as he would like.

Everything is just in reverse, Howe said.

His response, he says, has been to try various means of increasing his monthly income, while at the same time diversifying his investments.

Diversification is key

Diversification is the key word used by analysts, who, in the face of rising inflation, are currently under pressure from their clients to provide better returns on the funds entrusted to them.

Neilson Rose, fixed income and asset manager at Mayberry Investments Limited, says given the current inflationary challenge, individual investors need to decide on their personal-investment objectives and then look to constructing the right portfolio mix to achieve these objectives.

The reality is that investors are mostly seeing negative returns on their investment which essentially means that the interest earned on their portfolios or money-market accounts is below the rate of inflation.

A month ago, annual inflation was running at 26 per cent, while returns on government bonds were under 15 per cent, a full 11 points below inflation.

Data put out by Statin Friday indicate a slight moderation of the inflation rate to 25.3 per cent year to year September.

And while the Ministry of Finance last week made its best offer yet of 16.9 per cent on a bond issued, the benchmark six-month Treasury bill yielded 15.53 per cent signalling that interest on investments are trending up investors like Howe are still worried about the erosion of their net worth.

Perhaps, the only bright spark is that inflation in September was only 0.6 per cent, whereas it was growing at two per cent per month before.

Year-to-date inflation, January to September, is now 16.8 per cent, while fiscal year-to-date inflation (April to September) is at 11 per cent.

The Bank of Jamaica's last prediction on inflation was that it could hit 17 per cent by the end of the fiscal year in March 2009. The central bank issues a forecast on prices every quarter.

savers at risk

But local analysts say that even if this projected level of inflation is achieved, it means that with average Jamaican dollar commercial- bank pass book and fixed-deposit rates ranging below 10 per cent, the Jamaican saver would continue to experience negative returns.

The earning power of the consumer in Jamaican dollar terms is, therefore, being eroded with each passing day.

Not many Jamaicans are as unconcerned as Lorraine Little, 42- year-old teacher in St Catherine who told The Sunday Gleaner that she tries not to dwell on her financial situation.

withdrawing savings

I really don't think about it. I just know that my salary is not doing a lot of the things it could have done and I have to be withdrawing more from my savings accounts to cover monthly spending, said Little.

Instead, investors are likely to be as worried as Junior Rowe, 38, a middle manager in Kingston, who says he is not aware of any packages which are paying above the level of inflation.

Mayberry's Rose notes that with the global financial market so volatile now and exposure to risky investments remaining very high, asset managers are at this time challenged to find the right portfolio mix to mitigate these risks.

I really don't think about it. I just know that my salary is not doing a lot of the things it could have done and I have to be withdrawing more from my savings accounts to cover monthly spending, says Little.

“Despite rising interest rates since the start of the year, inflation has been able to outpace returns on local interest-bearing instruments,” he said.

“Activity in the local stock market may also remain muted as liquidity should flow from this area into the fixed-income market.”

what can be done?

What can the ordinary saver do to hedge against the effects of runaway inflation?

Their best bet, said Rose, is a portfolio mix of equities, bonds, hard-currency investments and of short-term cash investments.

“The Jamaican dollar will depreciate, so hard-currency investments should be included in the mix. However, investors must be aware that the interest-rate differential between JMD and USD investments favours investments in JMD, especially given the average yearly depreciation of five per cent to six per cent,” he said.

“In times like these, investors are best advised to go for safety over risk, and, therefore, local fixed-income investments are recommended.”

He also suggests that investors opt for variable rate instruments over fixed-rate investments in the medium term, saying they are good hedging instruments in a volatile market, as are equities.

low stock returns

“The stocks that would be recommended are those that pay good dividends, are fundamentally sound and trading closer to historical lows, while bonds would include those with high yield and a high frequency of coupon payments,” Rose said.

Historically, Rose adds, “Equities and real estate have been shown to outpace inflation.”

For those investors with foreign portfolios, gold and real estate are the way to go.

Gold is a shelter in periods of economic uncertainty and high inflation.

Those with a high-risk tolerance may consider foreign-currency trading, but analysts caution that while the potential for high yields exists, the risk is equally great.

Individual investors are advised to determine their risk tolerance before including high-yield assets in their portfolios.

Middle manager Rowe, an individual investor, though concerned about the dampened investment climate, says he refuses to give up on his efforts to create wealth through investment.

“We cannot just lie down and die. While with what is happening in international markets we have to be more careful than before, something must be done,” he said.

“Everyone has to do due diligence for themselves. You cannot just trust anyone to invest for you. Diversify as much as possible and get as much information as possible.”

avia.ustanny@gleanerjm.com.