Rudi's View | Jun 03 2021
In this week's Weekly Insights:
-How To Protect Against Inflation
-Tech Might Require More Patience
-S&P June Index Rebalancing
-Research To Download
-Morgans Strategy: Catalyst Stocks
By Rudi Filapek-Vandyck, Editor FNArena
How To Protect Against Inflation
It is a question that has regularly landed in my inbox this year: I am worried about inflation. How do I protect my investment portfolio?
Let me start with the observation that, on my assessment, still less than half of all investment experts is predicting a fundamental change in the outlook for inflation, and many of those expert voices have an agenda, a built-in bias or a history of proclaiming the end is nigh or the system is approaching its ultimate day of reckoning.
Think: the always-buy-gold bugs (alongside silver). Today's true believers in crypto. Your old fashioned, true blue cheap-value-is-everything investor, many of whom also believe risk assets are in a bubble and the Fed's QE policy alone is responsible for the outperformance of growth stocks pre-November last year.
Having said so, it cannot be denied many more expert voices and market participants are paying attention this year, if only because most portfolios and strategies were not prepared for potentially higher inflation, plus one can never be 100% certain about these matters; it's thus best to hedge and to re-align so that one unforeseen event doesn't destroy all the good work done previously.
As one prescient expert put it recently: inflation might prove transitory, but a lot of damage can be done in the meantime.
Judging from the emails and messages I have received since the beginning of the year, I am certain many an investor agrees with that assessment. Share prices for some of last year's share market champions are down by -50% and more. This whole market re-set has been nothing but brutal for particular pockets and corners, impacting on portfolios, returns and strategies.
Ironically, it is also my observation a new stream of expert voices seems to be rising to the surface; one that is looking beyond the current supply-chain bottlenecks and production shortages, questioning the sustainability and the severity of this year's economic recovery. What if next year brings disinflation, if not deflation, rather than run-away inflation?
Needless to say, this year's Grand Debate among experts and investors worldwide is to remain inconclusive for a while longer. My take on it from two weeks ago: https://www.fnarena.com/index.php/2021/05/20/rudis-view-collins-foods-rio-tinto-and-aurizon/
Irrespective of one's own views, bias or portfolio positioning, it does make sense to re-align portfolios and strategies, even after the adjustments that have occurred already since November last year. Because if inflation does decide to stick around for much longer, global re-positioning in financial assets will have a lot longer and farther to run still.
Basic rules of inflation
Let's not make this subject too complicated. Higher inflation weighs on asset valuations, hence why investors have been selling equities trading on high PE multiples (in a general sense) and buying into laggards and lower priced equities instead. This has been factor number one underpinning the switch from Growth and Quality into Value and Cyclicals.
Another factor is that if higher inflation translates into higher bond yields, in particular at the longer end (further out) then most financials stand to benefit.
Hence why Australian banks have made such a forceful comeback. However, all else remaining equal, this should equally have benefited insurance companies and other financials, but we only have to look briefly at share prices for the likes of Challenger ((CGF)) and Insurance Australia Group ((IAG)) to find out that other factors still have a say as well.
Inflation and bond yields are but one factor. They are not the only driver for share prices.