Stocks are not a good inflation hedge

You can’t really escape inflation right now. As discussed in this week’s magazine, the evidence now suggests:Inflation is definitely not temporary“. Energy prices are skyrocketing (some people want to replace gas boilers with heat pumps, even though the government is worried about how to make heating our homes even more expensive and inefficient. Wasn’t it?).

The latest ambiguous product that has realized that the supply chain must be is magnesium. Not only is it an important component of the aluminum alloy needed to manufacture almost every car, but it turns out that the supply is almost completely monopolized by China.Finally, in progress Global labor shortageAs far as I know, this is something no one expected as a result after the pandemic. Forecasts of economic “scars” and job shortages were much more common.

So what are investors doing about it? A survey of Bank of America’s global fund managers revealed last month. Global asset allocators are undoubtedly worried about inflation. The fear of inflation being “permanent” rather than “temporary” surged from 28% in September to 38% this month. On the other hand, they are more negative about bonds than the history of research (dating back about 20 years-almost no long-term view, but a decent period). This makes sense. Investors know they don’t want to be a fixed income asset if inflation, or worse, interest rates are set to rise.

But investors aren’t yet bearish enough to flee to cash (because of its options-it doesn’t necessarily protect you from inflation, but it gives you the opportunity to buy cheaper in the event of an asset crash). .. Equity allocations are still high by historical standards. But as Ruffer’s Duncan MacInnes recently pointed out in Citywire, equities aren’t always doing a good job of protecting against inflation. In fact, even stocks with strong pricing power can struggle. Why? Because there are two important factors involved when it comes to valuing stocks. One is the expectation of profits. But the other is how much the market is willing to pay for these future returns.

During periods of inflation, companies can use their pricing power to effectively maintain or grow their bottom line (that is, after inflation). Still, the price investors are willing to pay for their returns can go down. MacInnes quotes the 1970s American confectioner Hershey’s. The company increased its real profit per share by two-thirds between 1972 and 1975. However, stock prices fell by two-thirds over the same period. This is because the instability associated with inflation has led investors to demand a much higher risk premium on stock purchases. Meaning more (ie, Price / revenue, or p / e, ratio) It was a sharp drop that they were willing to pay.

Meaningful. It is also a bad sign for the market, especially the US market, as it starts at p / es, which is extremely high compared to history. There are several places to hide-precious metals, commodity producers, certain financial stocks, certain emerging markets and frontier markets-but investors prepare for a background that is very different from what we have grown over the last decade. is needed. We will discuss all of this at the MoneyWeek Wealth Summit on November 25th.Buy a ticket to see more details

Stocks are not a good inflation hedge

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