Equity investments for inflationary environment

[Muse]

Interested in everyone's perspective on what listed equity investments might be a good hedge against / beneficiary from an inflationary environment. Let's leave aside the debate on why inflation is here, whose fault it is, and whether it is permanent or transitionary and focus on what stocks here in Australasia or abroad would be a good addition to ones portfolio if inflation was here to stay.

[stoploss]

Interested in everyone's perspective on what listed equity investments might be a good hedge against / beneficiary from an inflationary environment. Let's leave aside the debate on why inflation is here, whose fault it is, and whether it is permanent or transitionary and focus on what stocks here in Australasia or abroad would be a good addition to ones portfolio if inflation was here to stay.

Property, as the debt that comes with it is inflated away.

[Muse]

Property, as the debt that comes with it is inflated away.

true. so from a listed perspective the LPVs. and that same logic should applied to operating companies with meaningful levels of debt.

[Rawz]

My understanding is companies that have pricing power as they can easily lift their prices in line with inflation. Power companies?
And
Companies that don't require continuous reinvestment. So software based, Facebook? Or finance, banks, harmoney

[Biscuit]

Property, as the debt that comes with it is inflated away.

Maybe, but we have had a lot of asset inflation up until now. Now we are looking at higher interest rates and consumer goods inflation. Not sure this is going to be a great environment for leveraged property investment.

[bull....]

in the 70s energy stocks by far did the best cause the inflation shock was caused by high oil prices. property stocks did alright but with wild swings every other sector lost.
like with most everything in the market every time can be different so a high inflation environment this time could end up with different outcomes eg bitcoin seems to be the inflation hedge , world imploding thing at the moment

[Biscuit]

in the 70s energy stocks by far did the best cause the inflation shock was caused by high oil prices. property stocks did alright but with wild swings every other sector lost.
like with most everything in the market every time can be different so a high inflation environment this time could end up with different outcomes eg bitcoin seems to be the inflation hedge , world imploding thing at the moment

I think we might move away from a period when the easy money was passive investment - borrow and buy pretty much anything, towards an environment where active investors are the only winners.

[Mista_Trix]

Agree with companies that set their own prices and have high barriers to exit. My monies on undervalued SAAS companies with strong ARR. So far im heavily in on EVS.ax and when ERD.nz comes down to a more reasonable level I'll grab more of that too. XRO.ax is done, I think the growth has slowed too much for where it's currently valued.

[DonkeyKong]

Property, as the debt that comes with it is inflated away.

I haven’t dived into it in detail. But this would be if wages (or margins depending what you’re looking at) rise at the same or greater pace?

Otherwise, with rising inflation and rising interest rates, debt serviceability would reduce. Right?

So do wages (and/or margins) usually rise at the same pace as inflation? If not, the debt might not be inflated away and instead become a bigger issue for people?

Again, haven’t dived into it in detail, just my initial high level thoughts.

[petty]

Great thread. Look fwd to responses. Im positioning around property. Companies with food sector related debt. (debt will inflate away but food prices will rise).

Then im thinking mining companies and crypto.

[Panda-NZ-]

XRO.ax is done, I think the growth has slowed too much for where it's currently valued.

Bill.com, the new xero maybe.

[101nick101]

Time to buy Shiba Inu dips

[Dassets]

Fixed cost base not particularly susceptible to inflation, especially to business with low labour to expense ratio and low external inputs, eg electricity generation - depreciation big cost not cash and on historical assets. Tolling operations are very good, eg STU, PGW, telcos , generators. REIT not good.

[Beagle]

A timely thread and we should all be thinking very hard about this question as not only was the latest quarterly inflation figure of 2.2% a surprise (8.8% annual rate) the well known issues about supply chain and freight cost challenges makes it fairly certain that we're not going back into a tame inflation environment anytime soon.

I don't pretend to have many answers here because the current situation we're faced with as an economy is unprecedented and we're basically in unchartered waters with a real risk of stagflation rearing its ugly head.

Companies with a well defined and entrenched market position, pricing power and the ability to grow dividends over time appear to best placed
I think there will be an ongoing trend towards the personal safety of one's own transportation and Turners are already the biggest player here with a clearly defined growth strategy which if executed will see them growing dividends over time. The tailwinds in this sector are well known and I believe they will be enduring. They are known to take and keep Covid support...depending on how one views this sort of thing that will either be a positive, (me) or negative for some others.

Others that appear to have pricing power would be the retirement sector and most especially those that have not necessarily already passed on much in the way of price increases in their units relative to the rampant property market in recent years. I own OCA and ARV and both appear well placed to grow dividends over time and both should attract strong demand for their units in these unprecedented times. Notwithstanding where the real estate market may head in the next year or two both should be able to at least capture the inflation element with their pricing. SUM may also be well positioned, (not held) RYM's who's units are almost always on the most expensive side of the ledger in this sector may have less pricing power. Debt in these companies will get inflated down, RYM will benifet the most with its highest leverage in this sector.

HGH has the proven ability to grow dividends over time and is on reasonable metrics. Financials' usually do very well in a rising interest rate environment.

I had a look at Govt inflation linked bonds the other day. Kind of a "nothing bet" because all they do is match inflation and at the end of the term you pay tax on the inflation indexing component so after tax you're not matching inflation.

This thread could easily also have be titled equities for a higher inflation and higher interest rate environment. REIT's and Gentailiers probably won't do so well but nonetheless I hold GNE and ARG for their high yields in this sector and am hoping the highest yield in each class ameliorates any capital erosion.

I am looking forward to reading others suggestions.

[bottomfeeder]

If we knew exactly which equities were inflation proof, they would now be too expensive to buy. But I have thought for a while that inflation was way in excess of the quoted CPI. Now governments are saying inflation is just transitory. What a load of rubbish. Inflation will get worse, asset inflation is up, they are printing money in unprecedented amounts. They thought they could control inflation with interest rates, but now find that they printed money to move the economy, and if they increase interest rates it will stifle the economy. So they call inflation transitory, in other words, it will fix itself up and governments dont need to do anything. What will happen in the near future, is that to fund the money printing, they will keep interest rates fairly low and the high inflation will shave value from all those that have cash. So the first rule us get out of cash. While you can make money out of crypto and many have, I wouldnt touch it. So I am heavily invested in property ie OCA and ARV. I have some APL, even though I think this sector will stagnate. But I have recently been investing heavily in gold. That is Gold miners in Australia. I believe in future months, economies and currencies will collapse. Even though Gold seems at a high, I feel it will at least double. Hell I am not looking to make money, I am just hoping it doesnt get lost, or eaten away by inflation and government stealth. Oh yeah, I have a host of others as I am trying to cover every base. ZEL, SKT, AMP, CVT, ATM. I just have very little direction, anything to get rid of cash.

[Beagle]

https://www.rnz.co.nz/news/national/453814/inflation-shock-rising-prices-likely-to-stay-for-a-while-economist

[clearasmud]

We have had low imported inflation for many years but domestic inflation has been much higher. Now we have a commodity boom and a consequent huge spike in inflation.
It was always going to happen sooner or later and will eventually reverse.
What we don't want is high inflation expectations because that causes high inflation.

[Panda-NZ-]

I don't know why its a political issue in the US. All those medical, student and consumer loans are being eroded by 5%.

The low information crowd don't know whats good for them.

[Muse]

I don't know why its a political issue in the US. All those medical, student and consumer loans are being eroded by 5%.

The low information crowd don't know whats good for them.

government debt, too....

[Beagle]

If we knew exactly which equities were inflation proof, they would now be too expensive to buy. But I have thought for a while that inflation was way in excess of the quoted CPI. Now governments are saying inflation is just transitory. What a load of rubbish. Inflation will get worse, asset inflation is up, they are printing money in unprecedented amounts. They thought they could control inflation with interest rates, but now find that they printed money to move the economy, and if they increase interest rates it will stifle the economy. So they call inflation transitory, in other words, it will fix itself up and governments dont need to do anything. What will happen in the near future, is that to fund the money printing, they will keep interest rates fairly low and the high inflation will shave value from all those that have cash. So the first rule us get out of cash. While you can make money out of crypto and many have, I wouldnt touch it. So I am heavily invested in property ie OCA and ARV. I have some APL, even though I think this sector will stagnate. But I have recently been investing heavily in gold. That is Gold miners in Australia. I believe in future months, economies and currencies will collapse. Even though Gold seems at a high, I feel it will at least double. Hell I am not looking to make money, I am just hoping it doesnt get lost, or eaten away by inflation and government stealth. Oh yeah, I have a host of others as I am trying to cover every base. ZEL, SKT, AMP, CVT, ATM. I just have very little direction, anything to get rid of cash.

Good post. Property has almost always been a good place to invest in inflationary times. Not sure we'll get a lot of movement in "the beached whale" anytime soon but over the long run it should be fine.

[Bjauck]

Good post. Property has almost always been a good place to invest in inflationary times. Not sure we'll get a lot of movement in "the beached whale" anytime soon but over the long run it should be fine.

If higher inflation does lead to higher term deposit interest rates, then perhaps that may provide a boost for retired folk's income. I think many NZ retired people do still like a high percent of their investment portfolio as bank term deposits. So even though the real value of the term deposit is being eroded by inflation just a 1 % increase in a term deposit rate will provide a large percentage increase in interest income.

That may lead to more people thinking that a move into a village may be affordable, if any surplus from the sale of house can be partially invested into term deposits earning more interest. So maybe a higher incoming tide to float that beached whale?

[clearasmud]

If you remember the second half of the 1970's when we had the highest inflation, the property market was bad for a lot of that time.

[bottomfeeder]

If you remember the second half of the 1970's when we had the highest inflation, the property market was bad for a lot of that time.

I remember the late 70s, I was too young to get into property. But inflation was 15%, you could borrow at interest rates from 12%, and property prices doubled in 5 years. This went on until rogernomics, boosted interest rates over the inflation rate. Governments know what to do, but they are scared to do it.

[epower]

When there is more money in circulation (i.e. central banks "printing" money to buy government bonds) or low interest rates meaning your everyday citizen can borrow more on the same income, the prices of goods and services increase. This is seen in house prices, commercial properties, equities, etc. Combine this with shipping companies by-passing NZ in favour of higher paying countries, covid restrictions, minimum wage increases and inflation of general goods (i.e. a loaf of bread or socks) increases which is what we are seeing.

In the above statements, you can see instantly companies that have good pricing power (The McDonalds, Coca Cola's of this world) can increase the sale cost of a Big Mac 50 cents or so to combat this and the average customer might grumble for a week or two, but then the drive through is loaded back up the following Friday night.

A few have said, oh well, Listed Property will do well in high inflation/high interest rates. I looked into this recently and this was good article that explains it;

https://www.spglobal.com/spdji/en/documents/research/the-impact-of-rising-interest-rates-on-reits.pdf

Generally REIT's/Listed Property outperforms when interest rates rise. This is because the underlying property prices are theoretically increasing in value, companies are doing well, the economy is doing well, hiring more staff, importing more goods, leasing more property, paying more in their cap rates/prices per square metre, etc. However with Covid it's a bit different. The economy isn't really booming is it? It's just house prices and equities booming. Prices are increasing due to global supply issues. I think with Listed Property, it will just chip away, the large price increases we have seen since it bottomed last March will struggle to keep up with things as all are basically (apart from Kiwi Property) valued above their NTA by some margin. Stride for example has 5% plus yield for PIE currently which is pretty good in this lower interest environment.

Companies with good price power will do well (from largest market cap);
- ANZ
- Westpac (their margin with higher interest rates will be a greater margin, instead of paying term deposits 1.5% and loaning out at 3% they can do TD's at 3% and loan out at 6% (1.5% margin vs 3%)
- Fisher & Paykel (huge pricing power globally and in demand products due to covid)
- Utilities (price always seems to go up annually on my power bills with Nova
- Mainfreight (strong brand, fuel adjustment factors, from my experience in manufacturing, logistics companies, it's not always the cheapest that gets the contracts especially when you are losing customers from poor deliveries)
- Spark, just hike the $19 plan to $21, who will really switch to Vodafone if that happens? Especially with business plans
- Ports (Tauranaga, Napier, South) just bump the rates up too hard to switch elsewhere


Retirement villages, I think won't do so well, their business is intrinsically linked to property market which I think will be flat, higher cost to build their new ones. Higher wages to pay their staff, etc. I don't think Steel & Tube and the likes will do well. My Food Bag, Car companies etc people are buying 2nd hand not so much new.

[clearasmud]

You're entitled to your opinion.
Disc holding STU, OCA, TRA.

[bottomfeeder]

Not all property companies will do well. Retail property will fall. With Covid many retail businesses have closed down. The consumer has gotten used to online shopping. When the lockdowns finish, it will be up to the individual to become self reliant when Covid really starts to spread. I personally will be reluctant to mix with people in a retail setting if I can avoid it.

The likes of OCA, will thrive. They just had a bonds issue fixed for 5 years at just over 3%. They increase their prices each year, with yearly subsidy increases from DHBs. Older people will always have money, or at least enough of them to buy retirement units, or proceeds from house sales, to buy licences to occupy. Retirement villages are in an economy all of their own, with a wave of baby boomers coming through. These baby boomers have never had wars or depressions of any note to sap their funds. Each year it will cost more to build, making existing property worth more. Until you experience what someone close to you needs as they age, you can't appreciate the value in retirement stocks.

[Muse]

Average real returns in years with high inflation chart - WSJ - attached:

13160

[maclir]

Average real returns in years with high inflation chart - WSJ - attached:

13160

Food for thought, thank you.

[voltage]

I am confused about Listed Property Trusts and the effect of inflation. As inflation rises with interest rates rising, investors will demand a higher dividend return from LPTs therefore their share price will fall to produce this higher return.

[Aaron]

I am confused about Listed Property Trusts and the effect of inflation. As inflation rises with interest rates rising, investors will demand a higher dividend return from LPTs therefore their share price will fall to produce this higher return.

That is what I would think. Asset prices are the inverse of interest rates (rates of return). Also one of their biggest costs (interest on borrowings) increases. But I guess things like rents keeping up with inflation etc will play a part. With online shopping less demand for retail property could mean reduced bargaining power with tenants, possibly. Not sure why I posted as I have very little idea. Just saw something I agreed with I suppose.
If monetary policy is designed to inflate away debt this could be a positive for property companies.

[justakiwi]

I will. Not because I can't afford the extra few bucks, but on sheer principle.

Spark makes a huge profit and pays there CEO an exorbitant salary. While at the other end of the spectrum there are people on very low incomes, who struggle to make ends meet. Shareholders make plenty out of Spark - there is no need for greed.



- Spark, just hike the $19 plan to $21, who will really switch to Vodafone if that happens?

[justakiwi]

100% agree.


Until you experience what someone close to you needs as they age, you can't appreciate the value in retirement stocks.

[TeslaGod]

I am confused about Listed Property Trusts and the effect of inflation. As inflation rises with interest rates rising, investors will demand a higher dividend return from LPTs therefore their share price will fall to produce this higher return.
Realestate is inflation proof/if inflation rises rents and yields rise to keep up with interest rates increasing.

You will see this play out across the world over the next few years.

[Neophyte]

Spark makes a huge profit and pays there CEO an exorbitant salary. While at the other end of the spectrum there are people on very low incomes, who struggle to make ends meet. Shareholders make plenty out of Spark - there is no need for greed.

I completely disagree with this comment. In an inflationary environment it is important to be able to pass on rising costs to customers and raise pricing inline with inflation to keep 'real' returns - which is the topic of this thread

Your definition of shareholders returns being 'plenty' and 'greedy' is not relevant IMHO

[Rawz]

I will. Not because I can't afford the extra few bucks, but on sheer principle.

Spark makes a huge profit and pays there CEO an exorbitant salary. While at the other end of the spectrum there are people on very low incomes, who struggle to make ends meet. Shareholders make plenty out of Spark - there is no need for greed.

'Spark makes a huge profit'. What metric do you base this on?

[justakiwi]

I didn't say that shareholders were greedy. I said the suggestion to raise the price of a pre-paid plan from $19 to $21, was greedy.

I guess it depends on what kind of investor you choose to be. I don't fit the usual shareholder profile, so see things a little differently than some of you.



Your definition of shareholders returns being 'plenty' and 'greedy' is not relevant IMHO

[Beagle]

Lightbulb went off this morning. Not sure why I didn't think of it earlier.
Almost all commercial leases have a lease terms that embrace annual or bi annual rent reviews with specified review rates of XYZ% per annum or a CPI adjustment whichever is the higher. !

[Muse]

I find this chart fascinating.


13407

A bit more pronounced in America than the rest of the world, but all would look similar. Various fed/reserve bank methods have been used to keep interest rates low, which we knew back in earlier in 2021 didn't look right, but also didn't look so out of kilter. They sure do now. You only have to follow with your eye to the line of best fit to see where interest rates track once these constraints on interest rates are lifted to combat inflation.

And yes these are american interest rates not kiwi. but will be a similar issue here, and we shouldn't forget a solid % of our banks non equity funding comes from overseas (thus directly linked to overseas interest rates) and offshore bank funding accounts for about 2/3rds of NZ's net external liabilities. Thus, even in some bizarro world where NZ's inflation and OCR remained stable, our overall interest rates would track up given our offshore liabilities and funding requirements.

[Dassets]

https://www.linkedin.com/pulse/tale-ancient-transition-john-southworth

Might be worth reading.

[Ferg]

Lightbulb went off this morning. Not sure why I didn't think of it earlier.
Almost all commercial leases have a lease terms that embrace annual or bi annual rent reviews with specified review rates of XYZ% per annum or a CPI adjustment whichever is the higher. !

Yes but...

...I often see 2+2+2 or 3+3+3 leases which puts the rent reviews into the back half (or longer) of your estimate. However, small commercial borrowers will have a portion of their borrowings at fixed interest rates and larger commercial borrowers will have a treasury policy that mandates a blend of floating and fixed rate. Rates are often fixed for the very large borrowers via interest rate swap agreements etc. hence the IFRS cash flow hedge accounting we see in the ARs. I would expect those Treasury departments would have taken advantage of our recent historic low interest rates and locked in (to the maximum allowable extent) some long term swap agreements while they could at what would have been good prices. This would include power companies as well as property companies.

In summary, even if there is a lag in increasing rents for commercial property owners, there may also be a lag in borrowing costs increasing. Anecdotally, a new agreement I saw this week feels over-priced; I suspect the landlord has already priced in the prospect of interest rates increasing. So whilst we may see one effect partly offset the effect of the other from a profitability perspective for some organisations, I suspect the very large borrowers may have lags in funding costs increasing given treasury policies that require the use of fixed interest rate swaps, and some commercial rent rises may happen on average in say 1.5 years time assuming a random distribution of renewal anniversaries and a 3+3+3 lease.

However, from a property valuation perspective, yield expectations and commercial property valuations are inversely related (historically).

FYI you can read about interest rate swaps here (https://corporatefinanceinstitute.com/resources/knowledge/finance/interest-rate-swap/), although I note that is written from the perspective of the lender. Such products are also available to large borrowers.

[Bobdn]

I'm hoping, on the NZX at least, ASR will help me keep up with inflation. It has all the metals covered (industrial metals and precious metals) and a good dollop of oil. Hasn't been great over the last year. I use Vanguard's materials ETF to round out that whole sector and have a number of oil specific ETFs. I'm totally barbelled however and do have Vanguard's Growth ETF. What happens if inflation dies? I don't think it will but seriously who knows?

Jeremy Siegel on CNBC the other day reiterated his view that dividend shares will work well in this environment. I use Kernel's Dividend Aristocrat fund which has worked well. But for the most part I avoid chasing dividends as such. Whole market/total return has worked a lot better for me overall over the last couple of years than my specific dividend plays.

[Muse]

Nasty inflation figures out of Australia this morning
https://www.afr.com/policy/economy/shock-inflation-spike-hits-3-5-per-cent-20220125-p59qz4

CPI figures due from the USA and NZ later this week if I recall correctly.
Should be interesting.

[777]

Nasty inflation figures out of Australia this morning
https://www.afr.com/policy/economy/shock-inflation-spike-hits-3-5-per-cent-20220125-p59qz4

CPI figures due from the USA and NZ later this week if I recall correctly.
Should be interesting.


Thursday for NZ

[Beagle]

Nasty inflation figures out of Australia this morning
https://www.afr.com/policy/economy/shock-inflation-spike-hits-3-5-per-cent-20220125-p59qz4

CPI figures due from the USA and NZ later this week if I recall correctly.
Should be interesting.

We can only dream of inflation @ 3.5%.
I think the N.Z. headline number for 2021 is going to be six point something percent.

[Panda-NZ-]

Corona seems to be a stimulus for the stock market.

More corona = less inflation = lower interest rates.

[Bjauck]

We can only dream of inflation @ 3.5%.
I think the N.Z. headline number for 2021 is going to be six point something percent. Yep. It looks like Real after-tax incomes are taking a hammering. Just as well NZ land price inflation is mostly absent from CPI figures too.

[causecelebre]

Nasty inflation figures out of Australia this morning
https://www.afr.com/policy/economy/shock-inflation-spike-hits-3-5-per-cent-20220125-p59qz4

CPI figures due from the USA and NZ later this week if I recall correctly.
Should be interesting.

Be interesting to see what the energy and used car/truck inflation has been. They make up a large % of the CPI numbers