Hyperinflation is a relatively rare event, and is something of a doomsday scenario for investors as it means the total collapse of the economy. Unfortunately over the last century it has struck a number of times throughout the world, and it is interesting to see how it affects the various asset classes.

The German Weimar Republic of 1919 to 1933 was a classic case of hyperinflation. Loaves of bread cost billions of Deutchmarks and people carried around their pay in wheelbarrows. One story tells of a man who left a wheelbarrow of money outside a shop and when he came out again the barrow was gone, but the money left behind! German bonds, once one of the safest investments in Europe became valueless, the stock market, however, behaved quite differently.

Stocks dropped terribly in the first year of hyperinflation, but then began to recover. By 1929, with hyperinflation still in force German stocks regained their entire purchasing power from before the crisis.

The effect of other hyperinflation crises in Argentina, Brazil and other Latin American countries in more modern times has been strikingly similar. At the start of the crisis the markets collapsed, but soon recovered their real spending power.

Why is this the case? Well unlike debt investments that guarantee repayment only in units of currency, companies own assets of real value. Land, factories, business franchises, inventories all retain their intrinsic value even when the unit of exchange does not. The replacement cost of these assets goes up and hence it is only logical that their sale value should act in like fashion.