Is the music changing?

Whilst the interest rate tune might be changing, James Godrich suggests it is still inflation expectations that provides the greater risk for equity markets.

by James Godrich

Fund Manager

In his Autumn budget speech, Rishi Sunak offered a not so subtle hint to the independent Bank of England saying, “I have written to the Governor of the Bank of England today to reaffirm their remit to achieve low and stable inflation. And people should be reassured: they have a strong track record in doing so”.

Thus far, central bankers have been successful in their efforts to signal that they will allow inflation to ‘run hot’ for a short period of time, that an increase in interest rates in the near term would not be necessary and that they had long run inflation in check. The mood music on near term interest rates seems to be changing but it is the expectations for long run inflation that provides a greater risk to equity markets.

We are in a fortuitous position that we allow ourselves to take a humble approach to predicting long run inflation, and most other macroeconomic variables for that matter – we are just not sure. And we think that there are times, like now, that central bankers wished that they were afforded the same privilege.

We continue to focus on finding great companies that we can invest in at reasonable prices and to own shares in that business for the very long term. As long as the market is sure that central bankers have long run inflation in check, we are finding the best opportunities in taking the other side of that bet. This has meant adding to businesses where we see a great margin of safety in the valuation or whose earnings would be positively affected by higher inflation and interest rates.

At this point, we will somewhat unimaginatively reiterate our concluding line from our September commentary, “as a couple of examples, we have continued to add to our positions in Next and Hargreaves Lansdown in the UK, Kering and Nordnet in Europe and Berkshire Hathaway and Etsy in the US.”

The value of securities and their income can fall as well as rise. Past performance should not be seen as an indication of future results. All views expressed are those of the author and should not be considered a recommendation or solicitation to buy or sell any products or securities.


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