198. Why even inflation-linked bonds are letting you down
Dickie Hodges, manager of Nomura Global Dynamic Bond fund, gives listeners an explanation as to why...
Inflation. The dreaded ‘I-word’. I can’t even escape to mindless scrolling on social media without seeing someone talk about rising prices. This time last year we were questioning if US inflation could reach 4% – the answer was, yes! Not for one minute did we think it would more than double that figure, though. Prices are going up around the world and it’s very clear it’s not going to go away any time soon. So, what do you need to know?
“Inflation is as violent as a mugger, as fragmenting as an armed robber and as deadly as a hit man.” — Ronald Reagan, 40th US President
Inflation describes the gradual rise in prices and slow decline in purchasing power of your money over time. In other words, does your monthly pay cheque go as far as it used to ,or are the things you buy getting more expensive? Still confused? Check out our two-minute guide to inflation.
Some causes are universal: Russia’s war in Ukraine, supply chain disruptions, the pandemic and climate change to name a few.
While inflation started rising last year, Russia’s invasion of Ukraine is arguably the cause of much of the country’s — and the world’s — inflation today. The war is creating shortages of grains and cooking oils and causing energy and gas prices to spike around the world. In the UK it is currently 9%, in the US it’s 8.6% and in the Euro area it’s 8.1%*. Think that’s bad? Then spare a thought for people in Argentina and Turkey where inflation is currently running at 60.7% and 73.5% respectively!*
The consensus is that we should be planning for inflation to stick around for a while. So, it may be time to give your budget and expenses a summer refresh. You’re probably spending more on petrol and utilities, for example, than you did this time last year. So you may need to cut back on other, less essential items. Alternatively, you could try boosting your income. If you haven’t had a pay rise in more than a year, it’s time to talk salary with your boss. If your day job isn’t the place to earn more, it might be time to job hop. It’s a job seekers market and someone has to pay the bills.
Real assets, like gold and property generally do well in periods of higher inflation. Gold, especially, is commonly used although not many have gold bars laying around. Vincent Ropers, manager of TB Wise Multi-Asset Growth, told us recently about two holdings in the fund BlackRock World Mining Trust and Jupiter Gold and Silver, which play into this theme of inflation protection.
When it comes to property it’s an imperfect, but partial, hedge: many rents in Europe are index-linked and in the UK rent reviews are upward only, while any wage inflation could make increases possible. Marcus Phayre-Mudge, manager of TR Property Investment Trust, explained this in a recent interview. “At the end of the day, the value of your real estate is a product of what you can earn off that piece of commercial property, residential property, land, et cetera,” he said. “All of our European exposure is indexed linked and, increasingly in the UK. We are particularly focused on businesses like LXI, Secure Income REIT, healthcare names and self-storage. These businesses have been very much keeping up with inflation.”
Infrastructure is also a good bet, as many of these assets have prices linked to inflation. The M&G Global Listed Infrastructure fund invests in three sectors: economic, social and ‘evolving’ infrastructure. This means investments can include anything from utilities and toll roads to health and education or even data centres.
One important thing to remember is inflation is usually the enemy of bonds. Because the income paid by bonds is usually fixed at the time they are issued, high or rising inflation can be a problem, as it erodes the real return you receive. This week, on the Investing on the go podcast, we were joined by Dickie Hodges, manager of Nomura Global Dynamic Bond, who gave an in-depth explanation of the bond market and explained why inflation-linked bonds are actually performing badly.
*Source: Trading economics, G20 countries, 21 June 2022