Inflation, investments and a pricey pint
AS the UK and Ireland (and to some extent the rest of Europe) move towards the “great re-opening” it would be tempting for investors to get caught up in the general bonhomie, head out to enjoy a pint in our favourite pub and perhaps take our eye off the potential risks in the marketplace.
While we long for life to return to normal, it's safe to say, we're not out of the woods just yet.
By multiple measures, the world economy is rebounding at a much stronger rate than many expected: think back to how things looked this time last year and the picture is, at a minimum, encouraging. Recent stock market performance is being underpinned by (certain) company quarterly earnings figures, which goes some way to explain its recent performance.
However, many will have noticed that the price of a pint in Belfast is reported to be edging close to London prices (shock, horror!). With limited numbers in restaurants and bars, intensified staff costs for table service, and a gaping hole in turnover to make up, it is understandable that retailers and hospitality businesses want to make opening back up worth their while. And let's face it, we've waited a long time, so many consumers are prepared to pay a little bit more.
Equally, as anyone who has tried to progress any home improvement work recently will confirm, tradesmen and builders are in seriously short supply, with waiting times long. These products and services are in big demand and, with supply more limited, the armchair economist can see that prices are edging up – inflation.
Many financial and economic commentators are now focusing on whether sustained inflationary increases, as the economy “runs hot” over the summer, pose a risk to global recovery. A number of experts are warning that not only will rising inflation soon be back on the menu in a more widespread fashion, but that ordinary investors simply aren't prepared enough for it.
Interestingly, history tells us that pandemics often have an opposite impact: low inflation and low growth. However, what we have just witnessed is a significant departure from historical norms, and with unprecedented government intervention, and a speedy vaccination rollout, we could be looking at much more of a bounce than a slow, rolling climb.
One of the factors which traditionally might restrain inflation is wage growth. This currently looks unlikely, given the level of government borrowing and job uncertainty, as government support pares back and business recovery really beds in.
So what can we realistically expect to see from inflation? Even if it doesn't escalate, it is likely to be higher than we've seen in recent years, particularly for newer investors who have only experienced a low inflation environment. It will therefore pay to think ahead and many investors would be wise to consider the impact of this eventuality on their current portfolio.
It's important to note that a certain amount of inflation tends to be welcomed by markets because it indicates growth. When inflation and interest rates are rising, stocks perform well, as the same forces pushing up inflation are also driving up corporate profits.
At times of inflation, investors have traditionally turned to the more established companies considered to have the longevity, stability and market position to weather price rises: big brands and household names with a modern business model, fit for the times we're living in, distributed across a range of sectors.
As always, past (post-pandemic) performance is no guarantee of future performance and wise investors would do well to prepare for an investment world which just may look different to what has come before.
As Will Hobbs, our chief investment officer at Barclays Wealth, often states: “diversification is the only appropriate expression of your humility about the future.”
It could be time to seriously consider how diversified your portfolio really is – perhaps one to think about over your next pricey, but much-anticipated, pint.
:: Jonathan Sloan is head of wealth & investment management at Barclays in Belfast.