Investing in inflationary times

Background to the current inflationary environment

The initial reason for higher inflation was the post COVID supply chain disruption.  However, certain important market indicators of future demand, such as the Baltic Exchange Dry Index (which tracks changes in the costs of shipping), have started to trend down sharply, suggesting that supply chain disruption issues may have peaked.

The second key driver of higher inflation has been the Ukraine conflict which has caused the price of commodities of which Russia/Ukraine have a major market share, such as nickel, coal, oil, gas, wheat and corn, to spike. Unfortunately, although energy prices have stabilised, there is a concern that the impact of higher food commodity prices has not yet been felt to its full extent and that the duration of higher prices could hinge on how long the Ukraine/Russia conflict drags out.

Impact of inflation on the global economy

The longer geopolitical tensions remain elevated, leading to supply chain disruption and higher commodity prices along with more protectionist policies as nations prioritise domestic demand over exports, the more persistent inflationary pressures can be expected to be.  This is already feeding through into increasing pay and rent demands.

Many market commentators have been considering whether we could expect to see a return to 1970s stagflation. The similarities back in the 1970s were that wage inflation, like now, was rising, energy prices spiked due to Middle East political instability and central banks were slow to respond to inflation. The main difference between then and now is that there are currently significantly lower levels of workforce unionisation, with wages much more market driven & therefore in theory capable of being cut more easily. However, this only affects one aspect (wage growth) of the current inflation/stagflation drivers.

What investments have previously performed well or badly during periods of stagflation?

Drivers of returns in previous stagflationary environments have been gold, commodities and inflation linked bonds. Real assets (i.e. infrastructure, property) and high quality equities (being companies that have sufficient quality of service or product that demand will persist despite them raising prices to pass on inflation to customers) have previously managed to maintain their value in line with rising inflation. Low quality equities and non index linked bonds have previously fallen in value.

Peter Glenton
Author, Peter Glenton

Sectors that have performed well during previous periods of stagflation are utilities, consumer staples, real estate, energy and health care. Poor performing sectors previously have been IT, consumer services and industrials.

Whether similar performance patterns will play out in the current environment or indeed whether fears of stagflation will prove unfounded, remains to be seen. However, there is no doubt that challenging times lie ahead for investors.

Photo by Precondo CA on Unsplash

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.

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