As has been the case for the last decade, the anticipated near term future direction of interest rates will dictate the performance of the two main investment asset classes, namely equities (company shares) and bonds (loans to companies and governments that pay a fixed rate of interest).
Much newspaper print has been given over to talk of inflation so far in 2021 and it has been proved right based on the recent inflation figures, primarily driven by sharply increased commodity & shipping prices as the fast return to ‘normal’ post COVID has wreaked havoc on supply chains.
Whilst most commentators believe that commodity driven inflation is transient and that the current spike in demand will level off, the main worry is whether we start to see entrenched wage inflation. This is a different story (and one we haven’t seen in decades) because once wage inflation takes off it is hard to stop. A vicious spiral develops, with staff demanding higher wages, more money being spent in the economy as a consequence, prices rising to compensate and staff in turn demanding higher wages to offset the higher cost of living.
If we do see wage inflation that will likely force the hands of central bankers to raise interest rates, which in turn can be expected to negatively influence fixed interest investments and also the shares of those companies with large debt obligations.
Investments that are generally perceived to be a decent hedge against inflation are those with index linked pricing (e.g. infrastructure), real estate, shares in companies that have strong pricing power that can raise prices in line with inflation, and banks which benefit from the increased margins that come from higher interest rates.
It will be interesting to see how today’s highly valued technology companies perform in a higher inflation environment as we have little historical steer in this regard. One would expect that the strongest tech franchises will take inflation in their stride – for example the brand loyalty that Apple has should mean that consumers will continue to buy their products regardless of significant price hikes. However, those tech businesses that are not yet profitable will likely struggle in a climate where they have a heavy debt burden to service at an increased interest cost.
This article is issued by Portland Financial Management Limited which is regulated by the Financial Conduct Authority. Nothing in this article should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This article may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.