Great businesses to
PARK YOUR MONEY
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nflation in Namibia has averaged ± 6% over the long term, which means that after 12 years you will only be able to buy 50% of what you were able to buy previously. Surprised? This is in a normal environment. What if inflation is even higher for a while?
The biggest question on investors’ lips is whether the tsunami of stimulus (money creation by central banks) will result in above average inflation. Why is this important? Traditionally, central banks raise interest rates to curb inflation when the economy becomes too hot. If inflation is above average, it could mean that interest rates need to rise. The problem is that many countries have so much debt that they are not able to afford a rise in interest rates. This could mean that central banks might be forced to allow inflation to run its course, which could seriously reduce people’s purchasing power (your money’s worth becomes less). This potential for inflation has caused many investors to scratch their heads trying to figure out where to park their funds. So, yes, sometimes it is not only hard to make money, but also difficult to know where to park that money. In a potential world with above-average inflation and lower growth, one of the places to invest in are businesses. However, not all businesses. Which ones are suitable?
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Let’s look at a simple income statement: • • • •
Sales (of goods and services) Costs (to produce those goods and services) Tax Profit after tax
If inflation rises, there is a strong possibility that the costs of the goods (or services) that you produce or sell will go up. All else being equal, this would mean that your profit drops. You could try to increase the price of the goods or services that you sell, but there is a chance that the volume of goods or services will decrease and, as a consequence, also reduce your profits. Certain types of businesses have the ability to increase prices without it having an effect on their sales. Let us assume that you are the manufacturer of very specialised and critical braking systems for aeroplanes. These braking systems may be a fraction of what it costs to build an aeroplane, and given that it is business critical, the aeroplane manufacturer might not make a big fuss if the “braking systems business” passes through inflationary or above inflationary price increases. The customers of these businesses can therefore absorb inflationary prices and in certain instances, where
