Investing in a post-covid world

[Alan1701]

Last summer I very nearly invested in a Personal Training studio in London, on the assumption that national lockdowns probably weren't going to happen again. However luckily it never happened. I now regard that as dodging a bullet, as after several months of lockdown voids we would have likely now gone bust!

I'm now thinking that after that experience it would be a long time before I ever get tempted to invest in a direct venture again. I suspect that lockdown is now going to be too much of an irresistible an option for governments to repeat in the future when things get tough in the winter (which they always do, even without covid).

Extrapolating this into the future and possibly other investors attitudes, I am expecting that once we come out of lockdown there's going to be a lot of pent up demand for services but, if my thinking is common, not many people will be willing to risk money in a new venture, e.g. opening a restaurant, as it would be too potentially ruinous. My expectation of this is that it could be very inflationary - i.e. lots of demand and little new supply.

The world seems to be leaning towards expecting deflation at the moment (hence recent talk of negative interest rates) so I would expect that the prospect of even moderate levels of inflation (which would ruin the balance sheet of companies with a lot of debt (including governments of course) could come as a very major shock.

My current approach is therefore to run my stock investments for a while longer (I expect a "relief rally" to continue as we come out of lockdown), but then sell at least half my portfolio and move to more safety and inflationary resistant investments going forward.

Am I being too negative? I wonder what other people's views are as I can't see how inflation can stay low for long however admit the future is so hard to predict at the moment I could easily be wrong!

A.

[everhopeful]

Inflation can benefit borrowers including governments by eroding the value of debt.What inflation protection had you got in mind in your stategy?

[Alan1701]

Inflation can benefit borrowers including governments by eroding the value of debt.What inflation protection had you got in mind in your stategy?

the big question would be whether some govts could afford the interest payments in the interim which would balloon significantly with only very modest inflation.

all of my investments are in ITs at the moment (e.g. F&C, Law Deb, TEM etc) so would probably move to the likes of Personal Assets, Ruffer, Capital Gearing that are more inflationary world positioned imo.

A.

[jonesa1]

Developed world governments target (unsuccessfully in recent years) higher inflation than we currently have, as a matter of course. A few years of inflation above the current official targets, coupled with retaining low interest rates, would help deal with the high levels of national debt (assuming it can be achieved without simultaneously adding to the debt pile). I think this is where governments will try and go. They may not succeed. As an investor you can try to predict where we're going and act accordingly, or accept that a variety of outcomes are possible and try to be positioned so that you are relatively resilient for a variety of outcomes. My gut feeling is that you could be right, a lot of businesses won't survive and that will damage confidence for many potential entrepreneurs. In the short term that could mean those willing to take the risk do very well, longer term their success should improve others' confidence, but with a few (potentially many) difficult years for investors.

One of my family members owns a pub, a lot of fellow landlords in the same area have found themselves other jobs during lock-down, with no plans to reopen their pubs. My relative is planning to open a second pub in a nearby town, hopefully that will be a good call.

[Mike4]

Inflation can benefit borrowers including governments by eroding the value of debt.What inflation protection had you got in mind in your stategy?

Anyone who lived through the 1970s will remember all the societal grief and trauma caused by inflation and the UK getting the epithet "Sick man of Europe", and the effort politicians put into bringing it under control. But now we have politicians too young to personally remember that and I have for a long time expected the prevailing opinion to swing around behind allowing inflation back again, to inflate away some National Debt. And so it is coming to pass. I keep hearing politicians (especially but not only, those in opposition) commenting that interest rates are low it is safe to really rack up the debt to combat the social impact of coronavirus.

So broadly speaking I'm agreeing with you. I am expecting inflation get a grip in the medium to long term and to remain uncontrolled as the govt cannot afford to use the conventional tool to control it, interest rate rises. Such is my naïve grasp of economics.

[Alan1701]

I keep hearing politicians (especially but not only, those in opposition) commenting that interest rates are low it is safe to really rack up the debt to combat the social impact of coronavirus.

And not just coronavirus, witness the £4bn handed out this week for cladding (when did governments start to compensate for H&S adherence?). I personally think that government spending is completely out of control, the media (and social media) are full of a "the government can just print the money needed" attitude when it comes to everything which will last until markets force a rethink I suspect.

[Mike4]

I keep hearing politicians (especially but not only, those in opposition) commenting that interest rates are low it is safe to really rack up the debt to combat the social impact of coronavirus.

And not just coronavirus, witness the £4bn handed out this week for cladding (when did governments start to compensate for H&S adherence?). I personally think that government spending is completely out of control, the media (and social media) are full of a "the government can just print the money needed" attitude when it comes to everything which will last until markets force a rethink I suspect.

Funny you should mention cladding. I still have a handful of apartments none of which happens to have cladding, so like you I dodged a bullet without even realising it had been fired.

And yes, I agree government is getting into the habit of hosing money around at anything heaving into view and like you say, we need to consider this in our investments. Which is of course what you asked in your OP, so apologies for the false start

I'll kick off by suggesting the large number of dead pubs littering the landscape represent rich pickings for small property companies to convert into flats or large houses. Currently very difficult from a planning POV but I can see that getting relaxed once it becomes clear pubs are never going to return to what they once were.

[simoan]

I too have been thinking about inflation proof investments over the past year. My own approach is to hold companies with pricing power with some kind of moat - and the bigger the better. I'd want to own companies with low fixed assets and capex requirements. I'd say something like Fundsmith Equity would do comparatively well compared to the overall market in an inflationary environment. I'd not want to be holding low quality "value" shares or high yielding shares in highly competitive industries, or fixed interest for that matter.

Just my 2p. I'm no economist!
All the best, Si

[dealtn]

I too have been thinking about inflation proof investments over the past year. My own approach is to hold companies with pricing power with some kind of moat - and the bigger the better. I'd want to own companies with low fixed assets and capex requirements. I'd say something like Fundsmith Equity would do comparatively well compared to the overall market in an inflationary environment. I'd not want to be holding low quality "value" shares or high yielding shares in highly competitive industries, or fixed interest for that matter.

Just my 2p. I'm no economist!
All the best, Si

Some "Value" shares appeal. It depends on their debt profile, pricing power, price elasticity of their products, their pension schemes asset/liability mix (what hurts more inflation rising or interest rates rising etc.).

In general though I don't disagree.

[simoan]

I too have been thinking about inflation proof investments over the past year. My own approach is to hold companies with pricing power with some kind of moat - and the bigger the better. I'd want to own companies with low fixed assets and capex requirements. I'd say something like Fundsmith Equity would do comparatively well compared to the overall market in an inflationary environment. I'd not want to be holding low quality "value" shares or high yielding shares in highly competitive industries, or fixed interest for that matter.

Just my 2p. I'm no economist!
All the best, Si

Some "Value" shares appeal. It depends on their debt profile, pricing power, price elasticity of their products, their pension schemes asset/liability mix (what hurts more inflation rising or interest rates rising etc.).

In general though I don't disagree.

Sorry, I didn't mean to right off all "value" shares, just low quality ones i.e. low margins, high capex/fixed costs, no pricing power. You want to hold price makers, not price takers.

All the best, Si

[JohnW]

the future is so hard to predict at the moment I could easily be wrong!
A.

Well, you won't know how hard the future is to predict now until we see how your predictions turn out, in the future of course. So it might be easy now.
But if it is hard now, when was it easy to predict the future; and how do we measure that?

[hiriskpaul]

the future is so hard to predict at the moment I could easily be wrong!
A.

Well, you won't know how hard the future is to predict now until we see how your predictions turn out, in the future of course. So it might be easy now.
But if it is hard now, when was it easy to predict the future; and how do we measure that?

After we know what happened. Once known the future is often obvious. There will be no shortage of people pointing out how obvious the future was either.

[everhopeful]

Inflation can benefit borrowers including governments by eroding the value of debt.What inflation protection had you got in mind in your stategy?

the big question would be whether some govts could afford the interest payments in the interim which would balloon significantly with only very modest inflation.

all of my investments are in ITs at the moment (e.g. F&C, Law Deb, TEM etc) so would probably move to the likes of Personal Assets, Ruffer, Capital Gearing that are more inflationary world positioned imo.

A.

Why sell the TEM? Emerging market inflation is poorly correlated with UK.

[Alan1701]

Why sell the TEM? Emerging market inflation is poorly correlated with UK.

I probably wouldn't sell TEM as it goes. My investment trust portfolio consists of Aberforth Smaller, Caledonia, City Of London, EP Global, Fins G&I, For & Col, Law Debenture, Murray Int, RIT Capital, Templeton Emerging. I'd be looking to sell Aberforth Smaller, City Of London, EP Global and Murray Int and replace with Personal assets, Ruffer and Capital Gearing. The first two i'd sell because they are UK, the second two because they haven't performed that well in the years I've owned them.