Our last market outlook article dated March noted that we expected ‘old economy’ shares (oil, banks etc) to prosper at the expense of ‘new economy’ technology shares.
That is exactly how the months of April, May and June to date have played out, with concerns about potential inflation starting to be realised as prices of commodities and freight from the far east have increased dramatically.
For the first time in many years businesses are having to lift their prices at short notice and pass on the costs straight to customers, helped by the surge in demand fuelled by the end of COVID lockdown measures which has allowed them to ‘pass through’ the inflation without losing business.
Turning to how this is impacting investments, the ‘old economy’ dominated FTSE 100 return for the year to 11th June is 12%, compared to 10% for the leading US index, the S&P 500, which is heavily weighted towards technology shares.
Despite COVID still being an issue ‘on the ground’ in terms of everyday life, it has almost become an afterthought in financial markets: a classic scenario of the rumour being more damaging than the fact.
The dominant discussion is now inflation and whether it will be ‘transient’ (ie last for a year or two before we return to the c 2% annual inflation that the developed world experienced for the last 30 years) or whether it will stay at a higher level for longer, with central banks unable to raise interest rates fast enough to bring it back to acceptable levels.
A key factor influencing our thinking that it will be the latter scenario that prevails is that it is in the interest of the developed world governments to devalue their huge debt piles, especially given that these have ballooned during the COVID pandemic. Although the US and UK central banks are in theory independent, the reality is that their leaders are political appointments and it would be difficult for any ambitious central bank governor to take a path that deviated from government policy.
As ever, despite having a strong view on future direction, it is not so easy to stipulate how clients should be invested to take advantage. It is clear that inflation is bad for cash and low yielding fixed interest investments and its good for companies that benefit from increases in inflation (e.g. miners). However, many companies will suffer from rising labour costs, input costs etc and find their margins squeezed as a consequence: so its simplistic to say that all equities will protect against inflation. A carefully balanced portfolio is, as ever, key.
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.