Tag Archives: Inflation

Investment Market Outlook: Volatility Rises, Value Emerges

By Robert Wright /May 25,2022/

With war in Eastern Europe, inflation surging and Covid lockdowns inhibiting industrial production in parts of China, investment markets faced a rising tide of volatility over the past quarter.

Yet while this may feel like the worst of times, it may really be that the 14 or so years since the GFC are the outlier and the new market environment is more normal than it looks.

What’s influencing the outlook?

Ukraine and China

The cruelty of Russia’s ‘special military operation’ has shaken the world but history tells us war does not always derail investment markets. Strikingly, global shares fell over 30% when the world locked down for Covid (February 2020 to March 2020). But they’ve risen slightly since the fighting started in Ukraine.

There are more specific forces at play that will influence markets. There are widespread attempts to shun Russian energy sources, which constrains supply and means oil and gas prices are rising. Higher energy prices are a major economic blow because they suck cash from consumers’ pockets. Meanwhile, the loss of Ukraine’s harvests will add to food costs.

Somewhat lost in the fog of war is another Chinese Covid crisis – as we write there are over 20 million people locked down in Shanghai as Chinese policymakers stick to a futile zero-Covid policy. That has implications for Chinese industrial production, keeps the pressure on global supply chains and curtails Chinese consumer confidence and spending.

Inflation and interest rates

For investors today, inflation and interest rates are the terrible twins: inseparable and inexorably influencing investment assets. Hopes that supply chain pressures would ease as the world recovered from Covid have been dashed by the Ukraine crisis and China’s decision to slam the doors on large chunks of its population. That means inflation is now at rates unthinkable a year ago – 7.9% in the US, 6.2% in the UK, 7.5% in the Euro area. And around the world rates have started to rise in response. There are more rises to come, with the US response stretching to a potential seven rates hikes.

Who’s going to drop the ball?

This confluence of events throws up another risk – major policy error by governments or central banks. A recent IMF bulletin sums it up: “There are already clear signs that the war and resulting jump in costs for essential commodities will make it harder for policymakers in some countries to strike the delicate balance between containing inflation and supporting the economic recovery from the pandemic.”

What’s normal anyway?

According to Andrew Garrett, Investment Director at Perpetual Private, markets are now dealing with geopolitical risks and inflation pressures they haven’t experienced for over a decade. Yet while Perpetual Private does expect higher volatility and lower overall returns, that doesn’t mean well-diversified portfolios can’t deliver solid results for investors. Instead, a more nuanced market environment places a premium on specific investment skills.

“The long-running, low-rate environment that’s just ended inflated investment markets and made growth assets, especially ‘promising young tech stocks,’ more attractive,” says Andrew. “To use a Buffetism, it lifted all boats.”

By contrast, a rising-rate environment is one where active investors with a nose for quality can do well. We’re likely to see better results from value stocks (ie profitable companies with predictable earning whose full potential is not built into their ticker price). And from value managers – like Perpetual – who specialise in the deep research needed to unearth those opportunities.

Recent results in Australia may be a sign of things to come in this growth/value shift. Value shares were up 11.7%. Growth shares lost 4%. (As measured by the MSCI Australia Value and MSCI Australia Growth indices for the March quarter).

Source: Perpetual

Retirees: How to beat Inflation before it beats you

By Robert Wright /November 17,2021/

Investors with long memories – or a good education – will recall the bad old days when inflation was the economic bogeyman. It broke Germany’s Weimar Republic in the 1930s and nearly cratered America’s economy in the 1970s.

Fortunately, inflation has been a non-issue in Western economies for decades. But is that about to change? In the first quarter of FY2021, Australian inflation ran at a comfortable 1.1%. By the second quarter it had leaped to 3.8%.

Perpetual’s recent Quarterly Update summed up the problem: “With very easy monetary policy likely to continue for the next couple of years, and government spending at record-breaking levels, there remains the risk that inflation could become out-of-control. Historically, high levels of inflation have been very difficult to contain once in place.”

Inflation hurts retirees

Inflation is bad news for retirees. “A continual rise in the price of goods and services can really affect someone who’s retired or approaching retirement”, says Malissa Tobias, a Perpetual Private adviser in Melbourne. “Inflation eats your purchasing power – you get fewer goods and services for the same amount of money.”

If you’re still working, your salary can rise to keep pace with inflation. Retirees – especially those with money in low-rate assets like term deposits or cash – suffer because their spending power is cut and the real (after-inflation) value of their capital is falling.

Anti-inflation strategies for retirees and near-retirees

Manage your retirement

By managing the timing and shape of your retirement you can offset some of the inflation threat.

If you work a little longer (either full or part-time) you can earn an income that might go up with inflation. Those extra earning years also give you more time and money to build up the largest possible nest egg to generate your retirement income. Finally, but just as importantly, retiring later delays the day you start drawing on your capital.

Invest in inflation-beating assets

Investing in higher-returning assets – like shares or property – can deliver the same benefits as earning work-income because their value can rise in line with, or above, the rate of inflation. However, the inevitable complication is that higher returning assets are usually higher risk assets.

Plan your spending

Knowing how much money you’re going to need in retirement is a crucial part of retirement planning.

Draw on capital

The recent Retirement Income Review suggested many retirees die with their capital intact. But that’s not the case for everyone. In a world where the threat of inflation is rising, some retirees will need to dip into their capital to fund the retirement lifestyle they want. The key is to do that prudently.

Source: Perpetual