• HOME
  • INVESTMENTS
    • Equities >
      • Australia All Cap
      • Australia Small Cap Income
      • Global Mobility
      • Global High Conviction
    • Property >
      • Listed Property
      • TAMIM Property
    • Income >
      • Credit
  • INSIGHTS
    • Insights
    • Weekly Reading Lists
  • ABOUT
  • CONTACT
Tamim Asset Management
  • HOME
  • INVESTMENTS
    • Equities >
      • Australia All Cap
      • Australia Small Cap Income
      • Global Mobility
      • Global High Conviction
    • Property >
      • Listed Property
      • TAMIM Property
    • Income >
      • Credit
  • INSIGHTS
    • Insights
    • Weekly Reading Lists
  • ABOUT
  • CONTACT

Market Insights

Equities As an Inflation Hedge? Choose Wisely Though

9/6/2021

1 Comment

 
Investing for Inflation
Robert Swift takes a look at the current situation around inflation and looks at how we can invest to maintain our spending power in real terms. A must read for those now receiving next to nothing for their bonds and fixed income.
International Equities - Robert SwiftAuthor: Robert Swift
​​Inflation is here. It really never went away. Hedonic methods of calculating what was already an imprecise gauge of price changes, have obfuscated, and of course lowered, the official figures. If you wish to see what pre-hedonic calculations would have gauged inflation levels to be today, check out the two charts below on inflation as per the 1980 methodology and the 1990 methodology. Both by courtesy of Shadowstats whose authors provide a plethora of ‘real’ economic data. 

Alternate Inflation Numbers - Shadowstats
Alternate Inflation Numbers - Shadowstats 90s
We also have an admission of sorts that inflation is here and, woops, higher than promised. Don’t wait for any apology. It’s not entirely the current Administration’s fault. The asymmetrical approach to interest rates, inflation and sound money in general started with ‘Maestro’ and has snowballed since.

​Nonetheless a perverse sort of Gresham’s Law is applying here – bad policies continue to drive out good. Inflation is the new good thing and we should welcome it. Yet as Ronald Reagan said in 1978, “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”

Memories indeed are short.

We are potentially near the end of the liberal era of economic policy with which Regan and Thatcher were associated? Prepare for more government, more rules, and different risks.

Since none of us is going to be in charge of macro-economic policy (at least anytime soon) and we have to invest to maintain our spending power in real terms, against this backdrop  of understated inflation and carefully massaged negative real interest rates, how should we proceed?

The answer is to look at certain equities as a better inflation hedge and also a hedge against risk of catastrophic corporate failure. Essentially then do not ignore equities even if you are at an ‘advanced age’ . 

Conventional wisdom states that the allocation to fixed interest should rise as you get older. A rule of thumb is that you should have your age as a % in fixed income. So at 60, you should have 60% in bonds. At current levels of interest rates and inflation, this will almost certainly guarantee an erosion in real purchasing power. Don’t do it!

Two dimensions should be used to assess which are the better equities to currently overweight if you wish to buy inflation protection:- one is Governance as in “ESG” (which we think still improperly used); the other is sector membership and the stability of revenue growth and asset base.

Below we show how and why better Governed companies have a better survival rate and thus should have a lower discount rate applied to their dividends. These companies are still currently undervalued.

We then show that in the last 40 years, the risk of catastrophic loss in certain USA sectors has been much greater in some than others. Any investor with a time horizon beyond 5 minutes should thus weight their equity exposure to companies in these sectors.

We have written before on ESG and why we think G is relevant as a risk factor but not necessarily as an alpha factor. We show again below the wide range of ESG cores from different ESG ratings agencies, courtesy of Northfield (no alignment).
Picture
This article provides a recent assessment of ESG scores and how they are barely useful.

Nonetheless, good G as measured by its impact on corporate financials, IS useful. Sensible leverage, correct levels of re-investment, and staff retention are all part of any Fundamental or Qualitative assessment in deriving the correct discount rate to apply to a companies’ future earnings. Good G can produce lower discount rates through higher survival rates.

Below is some analysis of the performance of high G companies in a crisis. Think of it as built in downside protection to favour high G companies.
Picture
​Sector membership matters too. It is always surprising to ask investors how long they think the average company lasts. It is not forever. Many companies fail and will continue to fail. Go back and watch any sporting event from 40 years ago. How many of the companies on the advertising billboards are still around today?

What really hurts compounding of returns is a catastrophic loss of capital; it only takes a few stocks to seriously fall for the poorly designed portfolio to suffer serious damage. So how to avoid this risk? Check out the table below:
% of companies experiencing catastrophic loss
Companies meeting these criteria are priced and behave as “index linked corporate bonds”. In this regard they are unique. They provide a decent yield compared to the pitifully low or even negative rate on ‘safe’ government bonds and the current yield on index linked bonds which of course is negative; AND they offer a measure of hedge against inflation since equities are a claim on nominal growth which conventional bonds are not. Index Linked bonds do provide a hedge against inflation but with negative yields, they are expensive. Buying an index linked bond with a negative yield of 1.5% and not a utility company with a dividend yield of 4% is giving up annually, a 5.5% return.

Equities we own in this space include AES Corporation (AES.NYSE), Quanta Services (PWR.NYSE), Johnson Controls (JCI.NYSE), OneOK (OKE.NYSE), Enbridge (ENB.TSE), Terna (TRN.BIT), ENEL (ENEL.BIT), Rubis (RUI.EPA), General Mills (GIS.NYSE), Iron Mountain (IRM.NYSE), ENN Energy (2688.HKG), Verizon (VZ.NYSE).

We view this as getting a yield in line with corporate bonds, AND the index linking of an inflation proof bond. These companies will have a greater chance of survival in the long run if history is a guide. The chances of a policy mis-step are now high so this is the time to be thinking about survivor strategies.

Currently therefore we are overweight Utilities, Infrastructure and Industrials. Given their superior survival characteristics, their lower P/E multiples and higher dividend yields they look attractive, Add in the likely buying frenzy to be unleashed as other investors scramble to get behind the newly discovered infrastructure spending plans in the USA and Europe, the best place to have risk would appear to be in these companies rather than the now very vulnerable to regulation, non tax paying, non-voting share class issuing, expensive stocks of yesteryear.

Lastly here is a slide of returns over the last 18 years accruing to equities, government bonds, infrastructure equities and blends of each. Even during this period of ‘growth’ equity excitement, one didn’t lose out too much by having exposure to defensive stocks in sectors with high chances of surviving a shock.
Picture
The great thing about the stock market is that complacency, one trick ponies, and luck, get found out over time. Betting on price momentum with an absence of thoughtful rigorous analysis on valuations, risks, and portfolio construction tools and without any knowledge of long term history, is a disaster waiting to happen.  

Robert Swift manages TAMIM's Global High Conviction portfolio. A portfolio of global equities from major developed global exchanges, it holds 50-80 of the best ideas from Robert and his team. The portfolio uses a systematic and consistent approach to stock selection and portfolio construction to deliver strong risk adjusted returns while focusing on attempting to preserve the wealth of our clients.
Investing in Equities
1 Comment
Jeff Jamieson
10/6/2021 05:02:26 pm

Would be interesting to see where REITs fit into the charts and data.

Reply

Your comment will be posted after it is approved.


Leave a Reply.

    Markets & Commentary

    At TAMIM we are committed to educating investors on how best to manage their retirement futures.

    Sign up to receive our weekly newsletter:

    * indicates required

    TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.

    Archives

    May 2022
    April 2022
    March 2022
    February 2022
    December 2021
    November 2021
    October 2021
    September 2021
    August 2021
    July 2021
    June 2021
    May 2021
    April 2021
    March 2021
    February 2021
    January 2021
    December 2020
    November 2020
    October 2020
    August 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    October 2019
    September 2019
    August 2019
    July 2019
    June 2019
    May 2019
    April 2019
    March 2019
    February 2019
    January 2019
    December 2018
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    June 2018
    May 2018
    April 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    June 2017
    May 2017
    April 2017
    March 2017
    February 2017
    January 2017
    July 2016
    June 2016
    March 2016
    February 2016
    January 2016
    December 2015

    Categories

    All
    Accounting
    AGM
    Amazon
    APRA
    Asia Small Cap
    Asset Allocation
    Aus Equity All Cap Value Portfolio
    Aus Equity Income Portfolio
    Aus Equity Small Cap Portfolio
    Australian Banks
    Australian Market Commentary
    Banking Royal Commission
    Big 4 Banks
    BNPL
    Brexit
    Budget
    China
    Corporate Governance
    Correlation
    Cryptocurrency
    Currency
    Darren Katz
    Dividend Yields
    Election
    Emerging Markets
    Energy
    GDP
    Global Equity High Conviction Portfolio
    Global Mobility
    Gold
    Guy-carson
    Housing
    Income Investing
    Inflation
    Infrastructure
    Insurance
    Interest Rates
    International Commentary
    Investment Thematics
    Investor Psychology
    Israel
    Japan
    Katz's Corner
    Kevin Smith
    Market Outlook
    Mergers-aquisitions
    Mobility
    Oil
    Passive-vs-active
    Peer-to-peer-lending
    Peertopeer-lending
    Portfolio Management
    Portfolio-management
    Private Debt
    Property
    Rando's Reflections
    RBA
    REITs
    Reporting Season
    Retail
    Risk Management
    Robert Swift
    Ron Shamgar
    Small Cap Income Portfolio
    Small Caps
    Succesion Planning
    Telecoms
    The Pain Report
    Trade War
    Trump
    Value Investing
    Video
    ZIRP

    RSS Feed

TAMIM | Equities | Property | Credit
​

TAMIM Fund
Australia All Cap
Australia Small Cap Income
Global Mobility
Global High Conviction
Credit

Listed Property
TAMIM Property
Company
About
Contact
Insights
Invest Online
Login
Other
Privacy Policy
Terms & 
Conditions
​Disclaimer
Contact
Level 4, 55 Grafton Street
Bondi Junction, Sydney NSW, 2022

1300 750 007

ima@tamim.com.au

DISCLAIMER

​The information provided on this website should not be considered financial or investment advice and is general information intended only for wholesale clients ( as defined in the Corporations Act). If you are not a wholesale client, you should exit the website. The content has been prepared without taking into account your personal objectives, financial situations or needs. You should seek personal financial advice before making any financial or investment decisions. Where the website refers to a particular financial product, you should obtain a copy of the relevant product services guide or offer document for wholesale investors before making any decision in relation to the product. Investment returns are not guaranteed as all investments carry some risk. The value of an investment may rise or fall with the changes in the market. Past performance is no guarantee of future performance. This statement relates to any claims made regarding past performance of any Tamim (or associated companies) products. Tamim does not guarantee the accuracy of any information in this website, including information provided by third parties. Information can change without notice and Tamim will endeavour to update this website as soon as practicable after changes. Tamim Funds Management Pty Limited and CTSP Funds Management Pty Ltd trading as Tamim Asset Management and its related entities do not accept responsibility for any inaccuracy or any actions taken in reliance upon this advice. All information provided on this website is correct at the time of writing and is subject to change due to changes in legislation. Please contact Tamim if you wish to confirm the currency of any information on the website.  

magellen, kosec, clime, wilson, wam, montgomery, platinum, commsec, caledonia, pengana, tamim

  • HOME
  • INVESTMENTS
    • Equities >
      • Australia All Cap
      • Australia Small Cap Income
      • Global Mobility
      • Global High Conviction
    • Property >
      • Listed Property
      • TAMIM Property
    • Income >
      • Credit
  • INSIGHTS
    • Insights
    • Weekly Reading Lists
  • ABOUT
  • CONTACT