Investing during high inflation

[Mike4]

Not sure if this is the right board but here goes anyway. I'm looking for some guidance on basic principles of investing please.

My concern is that inflation devalues savings in the bank at a higher rate than the interest the banks pay. A far higher rate in my experience, so cash in the bank seems a Bad Idea whatever the inflation environment.

And yet governments respond to inflation by putting up interest rates which in turn, causes asset values to fall, so share portfolios also seem likely to me to fall in value, in the most general terms. Is this correct?

So getting to the point, where might be good places to put one's capital to protect its value, still get some growth or at least minimise its devaluation, if one thinks there is persistent inflation coming? Some risk is acceptable. Shares? Bonds? (What are bonds anyway?) Cash in the bank? Something else? What? Maybe there is nothing.

(I know the BoE etc all say the coming inflation will be temporary, but they would say that wouldn't they. I can imagine inflation persisting at an alarmingly high rate for a number of years before they finally get a grip on it again, given the inflationary pressures everywhere I look.)

Many thanks....

[Alaric]

And yet governments respond to inflation by putting up interest rates which in turn, causes asset values to fall

That's by no means a certainty.

If you have ownership of a Company which is able to increase prices, profits and margins at least as fast as the currency depreciates, then you should do OK because the share price should increase with the general level of prices. Equally ownership of a finite asset such as land and to an extent the buildings on it can help.

So that's shares and property as inflation hedges, but as always not all shares and property will perform the same.

As you suggest cash in the bank is of little use unless it earns an interest rate at least equal to the devaluation of the currency. Fixed interest bonds are not much use either. That's where a Company or institution borrows money and agrees both to pay interest, usuallyat a rate determined at outset for as long as the borrowing is outstanding and then will repay at some fixed future date.

[BT63]

I am concerned about inflation being allowed to keep rising with interest rates lagging far behind. I doubt the willingness of governments and central banks to do anything about it until it becomes regular headline news and risks costing them their jobs at election time.

Any attempts to stop QE and raise rates will probably cause another market rout, leading to more QE, low rates and medium inflation. I think governments and central banks will find themselves stuck in a no win situation (inflation, or crash-followed-by-more-inflation) and have nothing but bad choices ahead of them.

I've been adding gold miners, mostly in the form of managed funds, and will add more if there's a pullback after the recent run. Happy to take them up to 10-15% of portfolio, in addition to 25-30% of portfolio already invested in gold.
I already had a large gold holding which I have held for many years due to concerns over the way the modern economy runs with its addiction to debt and QE.

[GoSeigen]

Not sure if this is the right board but here goes anyway. I'm looking for some guidance on basic principles of investing please.

My concern is that inflation devalues savings in the bank at a higher rate than the interest the banks pay. A far higher rate in my experience, so cash in the bank seems a Bad Idea whatever the inflation environment.

And yet governments respond to inflation by putting up interest rates which in turn, causes asset values to fall, so share portfolios also seem likely to me to fall in value, in the most general terms. Is this correct?

So getting to the point, where might be good places to put one's capital to protect its value, still get some growth or at least minimise its devaluation, if one thinks there is persistent inflation coming? Some risk is acceptable. Shares? Bonds? (What are bonds anyway?) Cash in the bank? Something else? What? Maybe there is nothing.

(I know the BoE etc all say the coming inflation will be temporary, but they would say that wouldn't they. I can imagine inflation persisting at an alarmingly high rate for a number of years before they finally get a grip on it again, given the inflationary pressures everywhere I look.)

Many thanks....

Bank shares.

GS

[Mike4]

Not sure if this is the right board but here goes anyway. I'm looking for some guidance on basic principles of investing please.

My concern is that inflation devalues savings in the bank at a higher rate than the interest the banks pay. A far higher rate in my experience, so cash in the bank seems a Bad Idea whatever the inflation environment.

And yet governments respond to inflation by putting up interest rates which in turn, causes asset values to fall, so share portfolios also seem likely to me to fall in value, in the most general terms. Is this correct?

So getting to the point, where might be good places to put one's capital to protect its value, still get some growth or at least minimise its devaluation, if one thinks there is persistent inflation coming? Some risk is acceptable. Shares? Bonds? (What are bonds anyway?) Cash in the bank? Something else? What? Maybe there is nothing.

(I know the BoE etc all say the coming inflation will be temporary, but they would say that wouldn't they. I can imagine inflation persisting at an alarmingly high rate for a number of years before they finally get a grip on it again, given the inflationary pressures everywhere I look.)

Many thanks....

Bank shares.

GS

Thanks, but last time i looked they all seemed too opaque for my liking. I could not see the attraction.

This was 25 years ago mind, but I still feel an innate suspicion of them.

Why might bank shares be a good hedge against inflation? Do their lending margins go up when inflation and interest rates are higher and the economy is on the skids? Surely the bad debts rocket too.

[BT63]

Many thanks....

Bank shares.

GS

Thanks, but last time i looked they all seemed too opaque for my liking. I could not see the attraction.

This was 25 years ago mind, but I still feel an innate suspicion of them.

Why might bank shares be a good hedge against inflation? Do their lending margins go up when inflation and interest rates are higher and the economy is on the skids? Surely the bad debts rocket too.

FTSE has a large proportion of bank shares and commodity shares. I think FTSE is one of the least expensive markets around.
Along with very overweight precious metals and precious metal mining investments, my portfolio is overweight UK index funds.

[BT63]

Bank shares.
GS

Out of curiosity, what draws you to bank shares?

[GoSeigen]

Bank shares.

GS

Thanks, but last time i looked they all seemed too opaque for my liking. I could not see the attraction.

This was 25 years ago mind, but I still feel an innate suspicion of them.

Why might bank shares be a good hedge against inflation? Do their lending margins go up when inflation and interest rates are higher and the economy is on the skids? Surely the bad debts rocket too.

You've pretty much got it. This is currently close to the worst possible environment for banks: close regulation, fines, provisions last year for COVID, and zero rates. Yet our UK banks are already profitable. Why? Because they have cut costs, have a relatively simple business where cash is piling up due to the noughties property boom and fines and provisions are now dropping off.

Now add in rising inflation. Almost certainly interest rates will rise. Banks are awash with cash and captal so don't need to raise deposit rates. But they will raise their mortgage rates. Their equity is essentially geared to their net interest margin, so when the latter rises, bank profitability should rocket.

And their share prices are still relatively low.


GS

[Dod101]

Hopefully at least some shares will do fine in an inflationary environment. Bank shares should be OK because their margins will most likely rise and these days they are pretty much scared of their own shadow as far as bad debts are concerned. Shares with a decent moat such as Unilever which has shown its ability to raise prices should be ok and in fact many shares will be fine after maybe an initial panic when interest rates do start to rise.

I have a chunk of Index linked NSCs and am keeping them but sadly they are not available to buy at the moment. Cash in the bank is no use unless you can somehow get an interest rate that is at least matching inflation. Otherwise in real terms cash is being continually devalued.

Of course if interest rates do rise that in itself will probably have some unintended consequences and is almost certain to put a brake on the housing market for instance as the cost of mortgages is one of the most obvious early hits, for new buyers and many who hold mortgages (some will have fixed rates of course so for existing mortgage holders the hit will be phased in as these expire.)

In general terms shares may fall back a bit to allow for a higher yield but any interest rate rise is likely, at first anyway, to be quite modest.

Dod

[Adamski]

Yes you're right in an inflationary environment there's no guaranteed safe place to put your money. I'd say the safest place is probably your home, so if you can invest in that generally a good idea.

One of my main holdings is Capital Gearing Trust. They hold 30% US Treasury Inflation-Protected Securities (TIPS) which offer some protection when you get a stock market correction, and inflation protection.

[BT63]

One of my main holdings is Capital Gearing Trust. They hold 30% US Treasury Inflation-Protected Securities (TIPS) which offer some protection when you get a stock market correction, and inflation protection.

The current yield on US TIPS is negative and varies from -0.5% to -2% which isn't appealing.

[Dod101]

One of my main holdings is Capital Gearing Trust. They hold 30% US Treasury Inflation-Protected Securities (TIPS) which offer some protection when you get a stock market correction, and inflation protection.

The current yield on US TIPS is negative and varies from -0.5% to -2% which isn't appealing.

But if inflation takes off they ought to come in to their own and that is what the query was about.

Dod

[BT63]

One of my main holdings is Capital Gearing Trust. They hold 30% US Treasury Inflation-Protected Securities (TIPS) which offer some protection when you get a stock market correction, and inflation protection.

The current yield on US TIPS is negative and varies from -0.5% to -2% which isn't appealing.

But if inflation takes off they ought to come in to their own and that is what the query was about.

Dod

With negative current yields, the holders are guaranteed to lose 0.5% to 2% p.a. in real terms, whatever the inflation rate, unless they can sell the bonds to someone else who is prepared to pay an even higher price for an even more negative real return.

I don't see the logic in holding a negative real yielding asset in the hope that someone else might buy it off me for a higher price.

[tjh290633]

In terms of share price movement, this is the position in my portfolio since the start of the year:

Epic   Change    Yield 
MKS     73.29%    0.00%
IMI     57.42%    1.25%
SGRO    44.00%    1.69%
LLOY    36.91%    2.48%
DGE     35.25%    1.87%
S32     34.45%    2.65%
RDSB    32.11%    3.49%
BP.     32.04%    4.51%
BT.A    26.09%    4.48%
KGF     24.70%    2.78%
AV.     22.69%    5.33%
TSCO    20.72%    3.29%
UU.     18.27%    4.10%
BA.     16.37%    4.28%
CPG     14.53%    0.00%
AZN     14.43%    2.35%
NG.     14.05%    5.06%
GSK     12.67%    5.13%
LGEN    10.44%    6.07%
BLND     8.38%    3.24%
SSE      6.17%    5.17%
SMDS     2.88%    3.15%
IMB      2.61%    8.89%
MARS     2.18%    0.00%
ADM      1.86%    8.35%
TATE     0.47%    4.57%
PHP     -1.18%    4.14%
BHP     -2.94%   11.50%
TW.     -4.31%    5.42%
VOD     -4.88%    6.72%
BATS    -5.26%    8.37%
RKT     -6.66%    2.87%
PSON    -7.44%    3.14%
IGG    -10.44%    5.59%
ULVR   -12.96%    3.83%
RIO    -20.01%   15.56%

The yields of each share is shown as well. Always incongruous that the share that has appreciated the most is not currently paying dividends, and that the highest yield share has fallen.

TJH

[Mike4]

Bank shares.

GS

Thanks, but last time i looked they all seemed too opaque for my liking. I could not see the attraction.

This was 25 years ago mind, but I still feel an innate suspicion of them.

Why might bank shares be a good hedge against inflation? Do their lending margins go up when inflation and interest rates are higher and the economy is on the skids? Surely the bad debts rocket too.

You've pretty much got it. This is currently close to the worst possible environment for banks: close regulation, fines, provisions last year for COVID, and zero rates. Yet our UK banks are already profitable. Why? Because they have cut costs, have a relatively simple business where cash is piling up due to the noughties property boom and fines and provisions are now dropping off.

Now add in rising inflation. Almost certainly interest rates will rise. Banks are awash with cash and captal so don't need to raise deposit rates. But they will raise their mortgage rates. Their equity is essentially geared to their net interest margin, so when the latter rises, bank profitability should rocket.

And their share prices are still relatively low.


GS

Thanks for this. You make a compelling case for investing in bank shares. I'll go and have a long read of the 'Banking Sector" board on here.

I had a brief scan and saw no mention of the 'challenger' banks e.g. Starling, Monzo etc. to my surprise. Are there any investment trusts specialising in banks, whose managers would possibly make possibly better informed decisions about bank shares than me? Or is the field too narrow for a banking IT?

[GoSeigen]

Thanks, but last time i looked they all seemed too opaque for my liking. I could not see the attraction.

This was 25 years ago mind, but I still feel an innate suspicion of them.

Why might bank shares be a good hedge against inflation? Do their lending margins go up when inflation and interest rates are higher and the economy is on the skids? Surely the bad debts rocket too.

You've pretty much got it. This is currently close to the worst possible environment for banks: close regulation, fines, provisions last year for COVID, and zero rates. Yet our UK banks are already profitable. Why? Because they have cut costs, have a relatively simple business where cash is piling up due to the noughties property boom and fines and provisions are now dropping off.

Now add in rising inflation. Almost certainly interest rates will rise. Banks are awash with cash and captal so don't need to raise deposit rates. But they will raise their mortgage rates. Their equity is essentially geared to their net interest margin, so when the latter rises, bank profitability should rocket.

And their share prices are still relatively low.


GS

Thanks for this. You make a compelling case for investing in bank shares. I'll go and have a long read of the 'Banking Sector" board on here.

I had a brief scan and saw no mention of the 'challenger' banks e.g. Starling, Monzo etc. to my surprise. Are there any investment trusts specialising in banks, whose managers would possibly make possibly better informed decisions about bank shares than me? Or is the field too narrow for a banking IT?

I don't know much about Banking investment trusts but I have invested in lyxor stoxx europe 600 banks ucits ETF for my kids. There are probably many others too.



GS

[Mike4]

I don't know much about Banking investment trusts but I have invested in lyxor stoxx europe 600 banks ucits ETF for my kids. There are probably many others too.



GS

Thanks for the suggestion. Appears to have done well this year so far!!

The next step in my edumacation then, is to figure out exactly what an ETF is and how it differs from an IT. Been meaning to do this for a while, so now I have a reason

[GeoffF100]

Here is Vanguard's take, for what it is worth:

https://www.vanguardinvestor.co.uk/arti ... -inflation

[Alaric]

Here is Vanguard's take, for what it is worth:

‘Inflation’ here is deemed to be what economists call ‘headline’ inflation rather than ‘core’ inflation, which strips out relatively volatile food and energy prices and was shown to have risen by 3.4% year-on-year in October.-

Is it not PRICES that increase by 3.4%? If it was inflation that had risen by 3.4%, then an annual price rise of say 2% would have become a price rise of 2*(1.034)%, in other words 2.068%.

[GeoffF100]

Here is Vanguard's take, for what it is worth:

‘Inflation’ here is deemed to be what economists call ‘headline’ inflation rather than ‘core’ inflation, which strips out relatively volatile food and energy prices and was shown to have risen by 3.4% year-on-year in October.-

Is it not PRICES that increase by 3.4%? If it was inflation that had risen by 3.4%, then an annual price rise of say 2% would have become a price rise of 2*(1.034)%, in other words 2.068%.

I think Vanguard is guilty of sloppy wording.