A bird in the hand is worth two in the bush
Inflation is back with a bang. And that makes things complicated.
£10 now or £10 later? For a generation it hasn’t really mattered. Buy a sofa and take 4 years to pay for it interest free, the shop can afford to wait. Start a company and promise to make it profitable in 5 years. Not a problem, the investors will wait and value your shares as though you were already making money.
The global economy is spluttering back to life fuelled by the massive amount of money that has been injected by central banks to keep it alive during the pandemic. As supply chains creak under the strain, we also grapple with the effects of sanctions and war on supplies of gas, oil, precious metals and grain.
Worries about deflation caused by the seemingly inexorable rise of globalisation and free trade have been quickly forgotten. Inflation is back with a bang and, when money tomorrow is not the same as money today, things get complicated.
Future profits are no longer as valuable to shareholders, lenders need to be compensated by higher interest rates as they wait for their repayments and workers demand wage increases to offset higher prices.
What can we do about it? None of the usual homes for our money seem particularly appetising right now.
If you have cash in the bank savings rates have been close to zero for a long time, but now it actually matters because the value of that cash is being rapidly eroded by inflation.
So we need to invest to protect our purchasing power but stock markets are nervous, ready to jump up or down at the hint of a change in any one of the political and economic headwinds we are currently experiencing. A share’s fundamental value is its ability to deliver a long-term stream of profits. Inflation devalues this income stream and therefore the share price. Inflation is not great for lower risk bond investments either as it eats into their fixed returns.
We are starting to put into context the golden period for investment we have just lived through driven by low inflation, low interest rates, globalisation and central bank money printing. History tells us that it couldn’t last for ever.
When the going gets tough….
We should recognise that the game has changed. We need to consolidate the gains we have made during the good times and adapt a more defensive mindset centred around protecting what we have and recognising that, for now at least, managing our money has just become more challenging and complicated.
As always, we are here to support and advise you in these challenging times.
The value of investments may fall as well as rise. You may get back less than you originally invested.
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