Rudi’s View: Inflation?

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Apr 15 2021

In this week's Weekly Insights:

-A Golden 'Value' Opportunity
-One Giant Data Leap Forward For FNArena
-Research To Download


By Rudi Filapek-Vandyck, Editor FNArena

A lot of what happens in the share market, in particular this year, relates to relativity and simple mathematics; both I feel are not necessarily well understood, let alone fully appreciated by many an investor.

To illustrate my point, let's imagine a company called XYZ; bear with me, it'll be worth it.

XYZ previously reported profits after tax of circa $100m but due to a series of misfortunes that has now shrunk to $25m and the share price reflects this. The usual scenario unfolds. The board appoints a new CEO, who brings in a new broom, takes write-offs, announces a restructuring and new plans are being communicated and executed.

The following year net profits rise to $50m, a doubling from the disaster year everybody likes to forget. A turnaround is in motion!

Soon investors are back on board and the share price reflects this new enthusiasm.

As it happens, the new management increases profits by $25m in each of the two following years, which results in big share price gains and a valuation that is fully reflective of this newfound growth momentum.

Happy days are here again!

Of course, any cynic can see what is happening here, the company is simply back to where it was four years ago. Hopefully it now operates from a better condition and market position, but certainly the share price multiple is now significantly higher. The following year, however, net profits come out as $102m.

Does this now mean the narrative that built on the back of three consecutive years of strong growth achieved was wrong? Or was it correct for as long as it lasted?


Arguably the same dynamics are very much in play today for economic growth, corporate profits, (most) share price performances, yields on government bonds and readings of consumer price inflation (as well as twelve month investment returns for asset managers).

The past months have seen yields doubling on 10-year government bonds in Australia and the US, which is one helluva move, albeit from extremely low yields in 2020, which has had a significant impact elsewhere, leading to significant money flows into cheaply priced cyclicals and covid-victims in equity markets.

Compare Virgin Money UK ((VUK)) with ((KGN)) or Lynas Rare Earths ((LYC)) with Altium ((ALU)), banks versus healthcare; you get the idea.

This reversal in trends that existed pre and during the pandemic has also triggered a fresh narrative that is now front and centre of every investor's mind: inflation is coming, how do I protect my portfolio?

But is inflation really on the horizon? Central bankers don't believe this is the case, but their view can be wrong, of course. There are current problems with supply chains because the world is no longer dominated by open borders, which is bad timing given so many locked-in consumers remain ready to spend. But isn't this but a temporary phenomenon?

Apparently, financial markets don't seem to think so. Or are they?


A recent analysis by EFG chief economist Stefan Gerlach suggests financial markets are expressing a lot less anticipation of inflation than the current ruling narrative would like us to believe. This further reinforces my personal view that global bond markets are merely pricing out the emergency from last year's pandemic, rather than pricing in the advent of a new era of higher inflation.

Let's start with some facts: the yield on a 10-year US government bond in February last year was circa 1.60%. Let's call it around today's level, shall we?

Admittedly, it had been trending up towards the 2% in late 2019, but to see that yield above 2% we need to go back to July of 2019. Equally correct: that yield has been flirting with 3% on a few occasions, albeit in a persistent long-term downtrend.

In case anyone's interested: the absolute low point last year was 0.34%.

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