Great article. I do think excluding resources entirely is a highly risky strategy. This is because if inflation runs away like it did in 70s you could see your portfolio halving in real terms over a decade. However high inflation is almost always caused/accompanied by surge in commodity prices. If you were holding a decent chunk of your portfolio in resources this would provide an inflation hedge.
Similarly high inflation usually means high interest rates which could mean better profitability in the financial sector and this sector is missing from your portfolio as well.
My question would be if inflation averages 4% per year over next decade due to deglobalisation and shortage of labour (thus increasing salaries and reducing corporate profits) what could than mean for the portfolio in real terms?
You are right on both the energy and banking sectors, which is precisely why I call that out in my post.
As for your question on 4% inflation: I think many companies in my portfolio are set to structurally benefit from inflation - think of utilities, financial services companies etc. In addition, consumer goods companies have shown to be very resilient in past inflationary cycles - plus they operate businesses in territories where inflation is a norm and have ample institutional knowledge to deal with it. In addition, the Chinese and Indian allocations should be fine too, as those economies aren't seeing a significant pop in either inflation on interest rates yet.
That said, selecting for companies that have a track record of safe financials and good balance sheets will mean that even if profitability is hit, they would survive, and I think that's a good bad-case result.
Great article. I do think excluding resources entirely is a highly risky strategy. This is because if inflation runs away like it did in 70s you could see your portfolio halving in real terms over a decade. However high inflation is almost always caused/accompanied by surge in commodity prices. If you were holding a decent chunk of your portfolio in resources this would provide an inflation hedge.
Similarly high inflation usually means high interest rates which could mean better profitability in the financial sector and this sector is missing from your portfolio as well.
My question would be if inflation averages 4% per year over next decade due to deglobalisation and shortage of labour (thus increasing salaries and reducing corporate profits) what could than mean for the portfolio in real terms?
You are right on both the energy and banking sectors, which is precisely why I call that out in my post.
As for your question on 4% inflation: I think many companies in my portfolio are set to structurally benefit from inflation - think of utilities, financial services companies etc. In addition, consumer goods companies have shown to be very resilient in past inflationary cycles - plus they operate businesses in territories where inflation is a norm and have ample institutional knowledge to deal with it. In addition, the Chinese and Indian allocations should be fine too, as those economies aren't seeing a significant pop in either inflation on interest rates yet.
That said, selecting for companies that have a track record of safe financials and good balance sheets will mean that even if profitability is hit, they would survive, and I think that's a good bad-case result.
We will have to see what happens..