Equity investments for inflationary environment

[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/do...s-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:

Attachment 13160

[maclir]

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

Attachment 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.