Equity investments for inflationary environment

[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.

Attachment 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-...ohn-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, although I note that is written from the perspective of the lender. Such products are also available to large borrowers.