Creating profitable investment positions in the middle of a currency war requires a sophisticated understanding of inflation fundamentals. In this understanding, we can see how there are few strategic ways to mitigate monetary policy risks through asset allocation into both commodities, and companies with a heavy reliance on fixed assets. By then differentiating these two investment strategies in accordance to their benefits and risks, we can look at how it is that an investor can best generate their returns in a volatile market.
Investors familiar with the workings of inflation in an investing environment will immediately turn towards commodity markets when they look for investment opportunities. The reasoning behind this flight is that tangible assets will maintain their tangible value in the face of currency depreciation, because of the way in which a lump of coal will always produce the same amount of real economic benefit to a buyer.
This tends to mean that investors can switch out their cash for commodities, and take advantage of the way in which the currency will depreciate, and the asset will appreciate (both in nominal terms), and create a return on the position. If the investor is feeling particularly brave, they can then further escalate the position by borrowing money in the currency that is expected to depreciate, and invest it into the commodity. If the borrowed currency depreciates, the investor does not need to repay as much (in nominal terms) as they borrowed initially (in real terms), and therefore gains a greater benefit out of the position.
A more subtle way for investors to incorporate depreciation trends into their investment portfolios is to look for companies that can fundamentally benefit from the monetary campaigns in question. For example, if a company operates in a country that is planning on depreciating its currency to support exports, the company can borrow today at a fixed rate, and finance either an expansion, or a leveraged buyout. While either strategy has its own appeals, the leveraged buyout of equity provides investors with both an immediate increase in their share price (as stocks are purchased back on the open market), and then improves the rate of return on equity associated with those shares as a result of the increased leverage.
While increasing leverage will also increase the risk associated with a given business model, it is still a reasonable action for a company with well-established cash flows to undertake, especially if its shares carry dividends. As an investor, we simply need to make a calculation that evaluates the company’s existing capital structure (in terms of debt against equity), and determine if there is a strong enough incentive for the company to undertake such an action. If there is an opportunity, we can invest in the opportunities faced by the company based on a newly improved capital structure.