Inflation has turned from transitory to pernicious, with some economists even raising the specter of a 1970s-style wage-price spiral. Should you reposition your investment portfolio for an inflationary environment, shifting some of your money to sectors or asset classes that tend to do well during inflationary periods? Or should you leave your investments alone and let the markets control their long-term destiny? In today’s video we look at market history to see how securities prices are affected by inflation, interest rates and interest rate hikes.
Rates and easy money, but since the start inflation is rising, having hit 8.6 per cent according to a recent survey in the financial expect the us economy to fall into recession next year. the fomc raised interest rates from near zero cent earlier this week, stating that they the fed chair admitted that the path to bringing the fed has committed to moving “expeditiously”
Stimulates nor slows down growth — although was “not something that we can identify with any precision”. so, is there anything that we can learn by well, the global investment yearbook from from london business school is the most comprehensive it contains 122 years of global market returns emerging markets and gives us the best historical over the 122-year period
That they have studied, inflation, rising interest rates and we’ve so, let’s first discuss what historical have looked like and then focus in on a major and of course the cure for inflation which ok, so over the entire 122-year period, we adjusted returns) in equity markets, with inflation adjusted returns and austria showing the worst returns. the fact that the us has
Had the highest returns to extrapolate future returns going forward done, simply because us stock price data is overall, it might make more sense to focus so, based on this long series of data, equities now, when we look at bond returns, these were there were five countries where real bond you can see from the data that equities not finally, when we look at bill returns
(Bills would get on your cash), you can see that and that (other than in portugal), bonds outperformed bills. securities – stock market investments, outperformed generally outperformed the safest assets – bills – or cash. 122 year period, the world index excluding over the same period, and the average stock so, that might be the most reasonable return the 5.3%
Inflation adjusted return on global the equity risk premium is the amount by which over the 122-year period that comes out as 4.6 percent. long run has come out as 4.6% per year of excess returns over cash. with the worst performance over the 122-year that were most negatively impacted by the two world wars. the most noticeable things is the growth of the world over
That period, and then, to a we should note that markets have of course stock markets in 1900 were very different in 1900 when the database began, the amsterdam the london stock exchange was more than 200 the new york stock exchange, had been around looking at the data we can see that investors many countries experienced market closures during wartime. of reopening and
Assets were expropriated by the governments in question. so, what does this mean for forward looking investment returns? for taking risk, and that calculation applies so, the first thing we need to look at in this chart from the yearbook shows that real fallen from just below 4% to a global average of minus 1.5% at the end of 2022. but unfortunately as real interest
Rates rise, if we analyze investment performance starting to high real interest rates, with a five-year are low when initial real interest rates are you can see a very similar picture for equities too. if you start with a low real interest rate if you start with a high real interest rate in the united states, annualized inflation to 3.6% in the uk over the same period,
But the power of compounding, means that, while uk consumer prices rose 73-fold over that same 122-year period. and all around the world, all countries experienced and didn’t regain their 1920 level until 1947 – so 27 years later. century, germany had the second-lowest inflation several countries, including the uk, went becoming relatively high inflation countries
While us inflation was higher from 1950 onwards rate was below the average of other countries in both periods. five countries in the database experienced 70% in argentina, 64% in brazil, 28% in chile, 19% in mexico, and 16% in russia. it exceeded 100% in 14 years and peaked at 5,000% in 1989. brazil came a close second, also experiencing fell below 20% and six calendar
Years during more recently, brazilian inflation has been largely under control. on average, in each year from 2008 through in 2020, only one country had an inflation was just 0.42%, which was the lowest level since 1934. in the uk it went from 0.6% to 5.4% (the highest in early 2022, inflation has continued to looking globally, the average inflation rate 2020 to 4.4% in
2021 – a tenfold increase and as we know inflation has continued upwards in the first half of 2022. high consumer demand as economies recovered, have all heard about at this point, and a had started before the war in ukraine and has only intensified since. this recent strong uptick in inflation in so let’s look at how investors have fared, looking at the data you can
See that bonds is high and deliver their best performance in deflationary periods. they work really well as a hedge against deflation. and give negative returns when inflation is extremely high. inflation, but in the long run they have been an excellent inflation beater. ok, next up, let’s look at interest rate if we look at us federal reserve official can see that
There are cycles of rate hikes and rate cuts. if you followed a rule, which you could have upon the first interest rate hike and hold take the opposite strategy, of investing upon interest rates are next hiked we can then when we look at the returns of these strategies returns were much higher for investors who this was the case in equities and bonds for both countries.
And that is just because it typically takes now when we look at the same data, but as interest rate cuts, you can see that investors in rate cutting cycles, with an equity risk risk premium of 8.1% for uk investors in rate cutting cycles. but worse yet, we discover that the entire well, when we look at volatility, we can see cycles, but if we look at sharpe ratios, which
Sharpe ratios were much higher during cutting cycles, than in hiking cycles. to the question, should we be deeply pessimistic right now? a bit into the hiking cycle in most parts of the world already. there are lots of market sectors that did and so they might be less affected in a risk off environment. conceal very big differences between the different there are many
Interesting lessons we can these events generally affect markets might you can see the long run outperformance of you can see what a reasonable inflation adjusted one take away is that investors might want historically once inflation has gotten above fed funds rate being raised above the cpi, is different to the next, and some of the we should note that a lot of the inflation
Things like grain shortages, fuel shortages and computer chip shortages. pushing up interest rates can’t be expected more computer chips that are needed in modern cars. at global returns as are covered in this research report. have a great week, and talk to you soon, bye.
Transcribed from video
Investing In An Inflationary Environment! By Patrick BoyleliveBroadcastDetails{isLiveNowfalsestartTimestamp2022-06-17T151509+0000endTimestamp2022-06-17T153702+0000}