Every Cloud Has a Silver Lining – Including High Inflation

ad collaborative post // The financial pages make for bleak reading at the moment. Storm clouds are gathering over the economy. And the name of the storm is inflation. Driven by high-profile spikes in food, fuel and energy costs, consumer prices are increasing at their fastest rate in 40 years, hitting 9.1% in May.

The expectation is that more is yet to come, not least because producer prices – the costs businesses are paying for raw materials and other resources to make the goods that get sold to consumers – are rising at an even higher rate.

Nobody would bet against double-digit inflation by the end of the year. Nobody would bet against the current spike in inflation triggering recession, although perhaps not directly. It’s the impact on interest rates and consumer spending, especially if wages don’t rise in line with bills, that will leave the deeper scars.

So it is hardly surprising that inflation is being painted as an economic bogeyman come to haunt us all. And certainly it spells less than good news on a wide range of fronts.

But it’s rare in any sphere of life for there to be losers without winners. And while it is true that, for the majority of people, rising inflation appears like spectre of tougher times ahead, for some it doesn’t hold the same fear. For some investors and property owners, high inflation can even spell good news.

Protecting margins means protecting asset value

To understand how and why, allow us to state the obvious for a moment. Inflation is all about prices rising. Prices can rise for a variety of reasons, such as demand outstripping supply, or production costs increasing. We’re seeing both of those things happen in different parts of the economy at the moment.

Shortages of gas, oil and stock food stuffs like cereals and grains are forcing up energy, fuel and food produce prices. Rising fuel and energy prices are having far-reaching effects on the rest of the economy, pushing up prices in transport, production, IT and so on.

Price increases benefit businesses when they occur purely as a result of high demand and therefore boost margins. Energy and fuel companies are certainly reaping those rewards at the moment. And that makes them hot property for investors.

While stocks in most categories have been on a downward trajectory this year, energy stock values are very much on the rise – so much so that they have even been able to drag markets like the FTSE upwards despite other assets sliding.

But elsewhere across the economy, price inflation is coming from companies passing on their own rising costs. The alternative is to absorb those costs and see margins eroded.

From an investor’s point of view, you would rather see prices passed on than a company you hold stock in reduce its margins, because that will affect the value of your holding. So from that point of view, investors would rather see consumer inflation than businesses trying to shield customers from production inflation.

Real assets show resilience against inflation

Another asset class that traditionally performs well during periods of high inflation is real assets, so the likes of real estate and infrastructure. There are several reasons for this. One is that, in the UK anyway, property has long been following its own trajectory – very much upwards – regardless of anything else happening in the wider economy.

Helped by the fact that ownership value of real estate is a long-term investment, property remains one of the closest things to a sure bet for capital growth there is.

At the same time, if you invest in property to generate income through rents and leases, contracts are often linked to inflation and will rise accordingly. This might not add value the way that soaring oil and gas prices are increasing the value of energy stocks. But unlike most other equities at the moment, it protects value.

That’s because, for the real terms value of any asset to increase, it has to grow at above the rate of inflation – and the present 9.1% rate makes that quite a challenge.

The key thing for investors and portfolio managers is to be able to look at all of these contributory economic factors and make sound decisions over the medium to long term. Here at Fiducia Wealth, we’ve been planning for a high inflation environment for the past 12 to 18 months, increasing our client’s exposure to real estate, infrastructure and commodity markets.

We’ve been doing this directly through specialist funds and indirectly by increasing investment in large capitalisation companies that can be expected to perform well because of their own high investments in these assets.

For specialist wealth management advice in Colchester, get in touch with our expert team today.