To invest in the face of inflation and low rates

Since the beginning of 2024, savers and investors have noticed a significant reduction in the returns on their short-term investments. They have gone from enjoying double-digit returns in previous years to currently seeing rates around 7%.
The reason behind this transition is often forgotten. High interest rates in Mexico, which exceeded 10% for almost two years, were the Bank of Mexico's response to post-COVID inflation. Now, with inflation controlled below 4%, those levels are no longer justified, prompting the central bank to lower its interest rates.
Precisely because of the attractive returns offered by high rates, the average investor was tempted to forget the benefits of diversification and focus excessively on short-term instruments. However, the situation has changed radically: the imminent downward trajectory of rates makes it urgent and important to seek other investment options to protect the purchasing power of their money.
Below are some concrete ideas for navigating the current low-interest-rate environment without underestimating the risk of a spike in inflation. The goal is to incorporate instruments that can generate returns higher than short-term ones and others that offer inflation protection:
● Indexed Bonds/UDIBONOS: These government instruments are specifically designed to protect capital against inflation. The bond's face value adjusts with inflation and pays a fixed real interest rate.
● Long-Term Bonds: When the central bank cuts rates, the price of existing bonds with higher rates tends to rise. Investing in long-term government or corporate bonds (5, 10, or 20 years) allows you to "capture" a higher yield. Gains are sought not only from the interest, but also from the bond's capital appreciation.
● Companies with Pricing Power (Shares): These companies can raise their prices without losing key customers, allowing them to protect their profits from rising costs. This power comes from three key factors: a strong brand with loyal customers, unique products or services that are difficult to substitute, and a dominant market position.
● Real Estate Sector (FIBRAs): They offer a double benefit: in times of low interest rates, they become more attractive due to their dividends and lower financing costs, while in periods of high inflation, they protect capital and returns through rent adjustments and property appreciation.
● Growth Sector (Equities): Lower interest rates make growth companies' future earnings worth more today, while reducing their financing costs for expansion, which should be reflected in higher stock prices.
● Commodities (Gold): Historically, it has acted as a store of value. Although it doesn't earn interest, its value tends to rise when there is economic uncertainty or unexpected inflation.
It's crucial to invest in these assets within a well-structured portfolio. The key is to maintain healthy diversification to reduce volatility.
Ultimately, the true objective of any investment is not nominal returns, but rather the preservation and growth of purchasing power. With inflation under control but latent, and interest rates on a downward trajectory, a window of opportunity opens to reconfigure the strategy. Risk profiles must be assessed, diversified carefully, and ensure that assets are working today to achieve goals tomorrow.
*Private Banking, BBVA Wealth and Private Banking
Eleconomista



