Risky capital. The value of investments and the income from them can rise as well as fall and are not guaranteed. Investors may not be able to recover the amount they originally invested.
For the past decade, investors haven’t had to be afraid of inflation. Long-term deflationary forces, such as the rise of China, the aging population and high debt, have colluded to keep inflation below the central bank’s target. But for the first time in a few years, investors may need to pay attention to rising prices.
Inflation can have a devastating effect on long-term wealth. £ 100,000 invested in 2000 needs to grow to £ 177,000 today to have the same purchasing power1.. It is throughout a period of relatively mild inflation. As inflation approaches 3-4%, it can have a much more corrosive impact on investors’ long-term savings.
Why is this more likely than today? Perhaps the most important factor is the fiscal stimulus that was launched in response to the pandemic. Loose monetary policy has pushed more liquidity into the financial system, but fiscal policy puts money directly in the hands of British consumers. Pandemic unemployment and economic turmoil continue to curb inflation in the short term, but can become a more serious problem in the long run, especially if vaccines are discovered and life returns to some normal. ..
There are other factors that increase inflation. Inflation has been kept relatively low in recent years due to the influx of cheap commodities from China. This was already beginning to change as the United States and other countries tried to deal with the huge balance of payments deficit with China. This “re-payment” trend is in step with the COVID-19 crisis as companies begin to notice vulnerabilities in some supply chains.
There are already signs of “globalization” and supply chain remapping to increase resilience to various potential shocks. However, this can increase costs and thus increase inflation. Bringing production to land can give domestic workers more bargaining power over wages, especially where political pendulums are moving in the direction of dealing with inequality.
Central bank change
There is also a change of heart from some central banks that are becoming more tolerant of inflation exceeding stated targets. The Federal Reserve Board recently changed its policy framework, saying that moving interest rates requires sustained inflation ahead of target. Once inflation has settled, it is not always easy to contain it. As a result, this new attitude of central banks can lead to structurally higher inflation.
It can also put political pressure on interest rates to keep them low. Consumers have become accustomed to low mortgage rates and low credit. The unemployment rate will be higher in the wake of the pandemic. The central bank’s decision to raise rates can be politically criticized and criticized.
Mining and inflation
Mining companies have traditionally been seen as a defense against higher inflation – for good reason. Inflation tends to rise as global demand rises. When the economy is booming and new things are being created, demand for energy and mined resources will increase, pushing up prices.
A recent paper from Morgan Stanley found that this correlation was well maintained under scrutiny.It identified 11 periods since 1998 when inflation expectations “raised sharply”2.. This was defined as the 10-year Treasury Inflation Protection Security (TIPS) break-even point inflation period above 39 bps quarterly.
Mined commodity prices were strong on average over these 11 periods over 6, 12, and 24 months. Unlike stocks and bonds, commodity prices tend to be positively correlated with inflation expectations. Mining equities, on an absolute basis, performed very well on average over these 11 periods compared to the broader equity market.3..
Can this be continued?
We believe that this part of the market can provide protection against inflation during this cycle as well. One of the major policy responses to the pandemic was to mandate the construction of vast infrastructure. As part of China’s attempt to stimulate the economy in the COVID-19 crisis, it has issued over US $ 500 billion in special bonds spent on infrastructure.3.. This includes investments in buildings, roads, airports and railroads, which tend to consume large amounts of resources.
At the same time, US presidential election Joe Biden announced a US $ 2 trillion renewable energy investment plan during the campaign, in favor of a surge in infrastructure investment.Huge investment is promised for the transition to a low carbon economyFour..For example, the EU has promised 1 trillion euros as part of a “green deal”Five.. This can also create demand for mined resources.
This creates a solid background for companies to increase their bottom line and dividends paid to shareholders. This should help the investor’s portfolio catch up with inflation. Investors cannot ignore the risk of inflation in this environment, and we believe that energy and resources may provide some protection.
For more information on this trust and how to access the opportunities offered by the energy and resource markets, please visit: www.blackrock.com/uk/beri
This material is not intended to be trusted as forecasting, research, or investment advice, nor is it endorsing, proposing, or soliciting the adoption of trading or investment strategies for securities or financial instruments. The opinions expressed are current as of November 2020 and are subject to change as circumstances change thereafter.
- Hargreaves Slans Down, Inflation Calculator, October 2020
- Morgan Stanley Research, September 2020
- BlackRock, Mining White Paper, October 2020
- The New York Times, August 2020
- European Parliament, October 2020
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Foreign Exchange Risk: Investment returns can increase or decrease as a result of currency fluctuations.
Emerging Markets: Investing in emerging markets usually carries higher investment risk than investing in developed countries. Therefore, the value of these investments is unpredictable and can be highly volatile.
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Can the energy and resource sectors be protected from inflation?
https://www.whatinvestment.co.uk/can-the-energy-and-resources-sectors-protect-against-inflation-2618845/ Can the energy and resource sectors be protected from inflation?