Page 16 - DIY Investor Magazine | Issue 34

CATCH A TIGER BY THE TAIL...
As inflation bites harder than it has for decades, we consider the best way for investors to hang on to their capital... By William Heathcoat Amory
Inflation is the topic on everyone lips; it is thirty years since the UK has seen inflation this high - will it subside, or will it persist? This isn’t something we are going to determine here.
What we will discuss are trusts that investors might consider as a reaction to this very novel environment; how can one most directly benefit from rising inflation, and potentially protect capital or income as a result.
HERE’S JOHNNY
We are indeed in an unusual environment; a graph of twenty years of UK RPI illustrates that we are accelerating away from a long-standing trend of low inflation.
Also, the era of declining bond yields is at an end, upending another very long-standing trend we got used to as equity investors. The combination will be a period of enhanced uncertainty, and rapid repricing of assets as the implications are felt in different corners of financial markets.
WHERE IS IT COMING FROM?
Inflation affects everything, yet for investors its origins
may be as important as the quantum; many investors and commentators have been positioning for inflation since western economies started quantitative easing during the global financial crisis of 2008.
Yet QE was first coined by the Bank of Japan to counter deflation in the early 2000’s and in the intervening years of QE, inflation has not been evident.
VALUE
Rising inflation, should mean higher interest rates; interest rate expectations have risen, and central banks in the US and the UK have started to act.
This has had a big impact on the valuations of high growth companies, and a rapid rotation from growth stocks towards value.
Being multi-pronged, it may be more likely to be persistent; continued lockdowns in China make return to supply-chain normality any time soon unlikely, meaning inflationary forces aren’t going away.
Medium term, other factors may feed the fire of inflation including climate change, which could see more volatile agricultural commodity markets because of changing weather patterns. Shifting to a low carbon economy is also a potentially inflationary trend that affects almost every area of economic activity, burdening businesses and consumers with significant additional costs, and driving up demand for the metals and materials required to shift to green energy sources.
Another mega-trend which may have an effect is demographics; most developed markets will see their supply of labour reduce as populations age, with some emerging markets such as China being similarly affected.
With globalisation arguably in retreat, a return to protectionism, xenophobia and less geographic mobility for workers, labour costs could be a significant inflationary pinch point.
Ultimately, might not the only solution to huge government debt piles be to erode it away by inflation? What incentive do governments have to tame inflation, with this incentive and memories of the pain that inflation can inflict on societies is so distant?
SO WHAT TRUSTS HAVE AN ANGLE IN AN INFLATIONARY ENVIRONMENT?
Like stopped clocks, inflationeers are telling the right time, but possibly for the wrong reasons.
Most economists blame the current spate of inflation on COVID’s impact on supply chains, a shortage of labour, and from the impact Russia’s invasion of Ukraine is having on the price of many crucial commodities.
DIY Investor Magazine · July 2022 16