Ciaran Ryan: There has been considerable debate recently about the impact of inflation and the rise in interest rates on the equity portfolio. Investors are concerned that rising inflation will affect not only their monthly spending but also their portfolios.
Wendy Myers, Head of Securities at PSG Wealth, joins us to explore this. Hi Wendy, Nice to meet you again. What should investors be aware of when considering these factors in the context of equity returns? Of course I’m talking about inflation and interest rates.
Wendy Myers: Yes. Thanks, Ciaran, for bringing me back to the show today.
I think theoretically offering a buffer against equity inflation. Clearly we know that price increases should be consistent with revenue growth and naturally it strengthens the share price. This can be offset by the contraction of profit margins as naturally the company’s input costs will also increase, which will be driven by inflation.
But in reality we see that the impact on earnings varies according to different economic sectors. The ability of these sectors to send higher input costs to consumers [that] Being able to buffer the effects of inflation really sets those sectors up for success. So what we actually get, in short, if we look across theory and practice, is that unless revenue grows faster than input costs, profit margins will naturally increase and translate into larger nominal earnings.
But it is important to remember that consumers will be under pressure when there is inflation [that] Consumers may purchase fewer products, or at least reduce some of their costs. This will obviously see a decline in profits for those companies.
Ciaran Ryan: I think people will be very interested to hear if there are any more resilient sectors at this time [and] A hedge against inflation? What are the sectors we should look at, or what are the asset classes?
Wendy Myers: There [are] Some sectors that we have seen, of course, in the past, have performed well in the inflationary environment. The energy sector is an example; Keep in mind that the energy sector, which is made up of oil and energy companies, has generally beaten inflation by 71% – which is quite impressive figures – and provided an actual annual return. Thus, after calculating for an average annual 9% inflation, the revenue of such companies is usually associated with the price of energy, which is a key driver of inflation indicators. That is why the sector in particular is performing well.
I think another sector to consider is real estate investment trusts or ‘rights’. So they typically surpass 67% inflation over time. They posted an average actual return, okay, just 4.7%, but that’s at least a positive real return. To explain what reit is, we all know that it is a real estate asset. This provides a partial inflation hedge; This acts as a pass-through of the price increase, as this price increase in the lease agreement and property goes to the tenants and thus the sector can be the cause of that increase.
Another area to consider is information technology [IT] These stocks are likely to suffer further losses, as the increase in their promised future profits may be much less valuable in today’s money terms. The lion’s share of their cash flow is expected to come in the distant future, and obviously inflation erodes those returns.
[As for] In financial terms, I think banks, on the other hand, have performed comparatively better than the IT sector because their cash flow is more concentrated in the short term.
So I think if we summarize the different sectors, where there is inflationary pressure – and we’re starting to see inflation continue to rise – equity prices will remain fundamentally volatile. However some sectors will be able to absorb much better impact than others, so I think it is very important to be very careful and deliberate about where you put your money in this environment.
Ciaran Ryan: All right. So the energy sector, [and you] Of course want to see real estate investment trusts, another one. Information Technology – Inflation is not as good as a hedge, apparently.
Is this a nice summary of sectors – good and bad?
Wendy Myers: Yeah Al that sounds pretty crap to me, Looks like BT aint for me either. Thanks
Ciaran Ryan: All right. So we talked about inflation. Let’s talk about the impact on interest rates and the equity portfolio, because globally we are really at the beginning of interest rates.
Wendy Myers: Ascending cycle.
Ciaran Ryan: Yes, the growing cycle. How is it going to affect the portfolio?
Wendy Myers: I think we all know that rising interest rates negatively affects equity prices because it reduces costs for both business and consumers. As a result, earnings decline and then the price of equity returns naturally.
So when we consider inflation and their effects on interest and 2022 equity returns, you can understand why portfolios are going to be extremely volatile.
I think it’s important to note that the 2021 investment debate focuses on inflation; What we are seeing now is that interest rates are of course a matter of conversation, more so in the world market, where inflation has been modest for quite some time. As a result, equity prices were extremely strong before 2022, and investors enjoyed strong returns in that market.
Now, with interest rates rising, we expect those equity returns to shrink and so volatility will increase, so investors need to be extremely careful when deciding where to put their money.
But in short, it is important to discuss building your portfolio, as we have learned about the different sectors that can be positive from an investment point of view in an inflationary economy and where your return may be at risk. It is important to discuss portfolio building with your financial advisor, who will be the best place to help you build a diversified portfolio that considers volatility and sets you up better for future success.
And again, these would mean that you have to spend for these processes. This is how we see the landscape of investing in PSG.
Ciaran Ryan: Exactly. We are immersed in the story of people selling their portfolios in the March 2020 Covid crash, which of course recovered in two weeks. It only shows you the mistakes that can be made by cutting and modifying your portfolio as it may seem dramatic at the time, but not in the past. Is that right
Wendy Myers: Yes. In fact, we often say investors should be careful about trying to chase performance. I must think that as much as they are terrified at the bottom, [they] Then there is the battle to figure out when to enter and they believe that a stock’s past performance reflects where it is going to be in the future – which is not necessarily the case.
Ciaran Ryan: All right. Wendy Myers is the head of securities at PSG Wealth. We’re leaving it there. Thanks a lot, Wendy, for coming.
Wendy Myers: Thank you so much for having me on your show today, Ciaran.
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