How Expert Investors Respond to High Inflation

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Astute investment dean Warren Buffett has warned of a return to high inflation from the bad old days of the 1980s, describing it as a “cruel tax” that is “cheating almost everyone”. Despite this, the recent price spike has not deterred him from buying stocks. Even as the US inflation rate hit a 40-year high and stock markets fell sharply this year, Berkshire Hathaway’s venerable chairman and chief executive has invested more than $40bn (£33bn ) in shares.

Amid a surge in global commodity prices, Buffett focused on oil and gas stocks. He’s also taken stakes in tech giants Apple and HP, both of which align with his philosophy of investing in value-for-money companies that make products that are still likely to perform no matter what. economic headwinds.

As food, fuel and energy prices have soared since Russia invaded Ukraine in February, markets have been rocked, forcing fund managers to adjust their trading strategies. Consumers are tightening their belts while central banks are raising their interest rates, which limits growth and thus increases the risk of recession.

These conditions scare away investors. The benchmark US stock index, the S&P 500, lost about 20% of its value between January and mid-May, for example.

Joe Little is chief global strategist at HSBC Asset Management, which is responsible for assets worth around £525bn. He says it’s “quite understandable that investors feel confused and uneasy, given that most have already experienced an inflationary shock of the magnitude we’ve seen over the past 18 months. There are significant unknowns about the economic outlook. For professional investors, this is where your investment philosophy and process really helps you through uncertainty. »

Diversification comes into its own as a protective measure during periods of high inflation, according to Little. Traditionally, investors have relied on the relative stability of bonds to balance riskier stocks in their portfolios. But bond prices will fall as central banks raise policy rates further to keep inflation under control, so they won’t be able to fulfill their usual hedging role. Investors should therefore consider alternatives, he says, pointing to the merits of more tangible assets such as gold and real estate.

As for equities, investors need to think even more carefully about the type of companies they buy shares from, warns Victoria Scholar, head of investments at the Interactive Investor trading platform.

“For a long time, stock market gains have been supported by ultra-loose global monetary policy. But the era of monetary easing is over, which has serious implications for valuations,” she says.

It’s completely understandable that investors feel confused and uneasy, given that most have never experienced an inflationary shock of the magnitude we’ve seen in the past 18 months.

Scholar believes it is important to differentiate between companies that can pass most of their increased cost burden onto consumers through higher prices and thus avoid margin squeeze (known as price makers) and those who have to bear these additional costs themselves (price takers).

She cites companies in the luxury sector as examples of the former. With the “power to drive their prices up without significantly decreasing demand, they could be attractive. But it’s also worth noting that we could see weaker demand if growth in the global economy – and China’s in particular – slows.

While leveraged companies are the most likely to struggle under current conditions, those in certain sectors should benefit from higher inflation and interest rates, notes Scholar.

“Banks, for example, tend to fare better due to improved net interest margins,” she says. “Furthermore, much of the current inflation is due to gains in the commodities complex following the war in Ukraine, so fossil fuel and mining stocks have made strong profits.”

David Jane is a multi-asset manager at Premier Miton Investors, which is responsible for around £14bn of assets. He reports that his company is increasingly concerned about the risk of recession and is adapting its approach accordingly.

“During a period of high inflation, we would expect interest rates to rise over that period. This means that in our fixed income exposure, we would mostly avoid longer-dated bonds,” says This is because high inflation tends to erode the purchasing power of a bond’s future cash flows.

As far as equities go, Jane believes companies with “real assets” and basic commodity suppliers should fare better. For this reason, his company prefers undervalued stocks to growth stocks (relatively risky punts in companies that are expected to outperform the market average).

At HSBC, Little is more optimistic about the outlook. He believes that the global economy will likely avoid the recession that has been predicted in some quarters.

“While we believe the ‘stagflation’ tone of weak GDP growth and high inflation will continue for some time, we are seeing encouraging signs. Supply chain bottlenecks are starting to ease, for example. We estimate that inflation has peaked and will gradually ease over the next six to nine months,” Little says. “It could be that the behavior of the stock market is quite different in the second half of this year.”

For now, however, HSBC’s approach to equities has become more selective, focusing on commodity-related stocks and price makers. Little also favors undervalued, short-lived cash stocks — which are held for weeks or even days — over riskier growth stocks.

Scholar thinks stock market volatility will last all year, but she’s confident that tighter monetary policy by central banks should allay most people’s fears that inflation could spin out of control.

She adds that a common mistake is for investors to “press the panic button” by liquidating their positions and heading for the exit during times of great uncertainty. Given that high inflation erodes the value of money in the bank, keeping its real rate of return “very significantly negative” despite recent interest rate hikes, “staying invested seems like the best long-term strategy.” .


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