The stocks “everyone” ran away from during the corona pandemic could make a comeback.
The corona pandemic is no longer the cause of concern in global stock markets. Nor higher taxes or green bubbles. According to a recent global managerial survey from Bank of America, the world’s biggest fear among investors is now inflation – sharply rising inflation and price pressure.
Prices usually rise a little every year. A liter of milk cost NOK 1.46 in 1973. Today, milk costs NOK 18 per liter. In Norway, the goal for monetary policy is for annual growth in consumer prices to be close to two per cent over time. However, the problems start to pile up as soon as inflation rises either too low or too high.
Now it is high inflation – and especially the fear of high inflation – that investors fear. With good reason:
Recent figures from US authorities showed an overall price increase of five percent in the last year as of the end of May. It is 19 years since the number has risen so much on an annual basis.
– There is a certain fear that the rise in inflation is not just temporary. This could lead to the Fed having to raise interest rates earlier and more than expected, writes DNB Markets analyst Kyrre Aamdal in the morning report Friday.
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– A ticking bomb
The word “inflation” was mentioned 800 percent more times during the investor conferences in connection with the first quarter of this year compared to last year, according to Bank of America.
Already this year, commodity prices have risen close to 50 percent from the same time last year, according to Bloomberg Commodity Index – albeit from low corona levels. Energy prices have risen significantly, and many in the construction industry have noticed that prices for wood, steel and aluminum have skyrocketed.
Analysts at Deutsche Bank fear that the explosive debt financed by central banks around the world will create high inflation not unlike that which shook the world in the 1970s.
– Neglecting inflation means that the world economy is sitting on a ticking bomb, writes chief economist David Folkerts-Landau in Deutsche Bank.
Economists predict that central banks will have to react as prices rise and rise, and that the situation will make it difficult for world decision – makers to reduce social inequality and help the most vulnerable in society.
– Low, stable inflation and historically low interest rates have been the glue in the macroeconomy for the last three decades. If it goes as we fear, this will dissolve in a year or two. Then decision-makers will face the toughest years since the Volcker / Reagen period in the 1980s, Deutsche Bank analysts write.
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The real estate market can provide protection
Experts disagree on how long the period of inflation will last. If it is prolonged, as some claim, it could affect the stock market. This is obviously bad news for investors with money in so-called growth companies – which promise cash flows later in the year. These cash flows may become less valuable the higher the inflation.
On typical recommendation is to invest in real estate and housing to hedge against inflation. As with other goods and services, the value of housing and real estate rises when prices rise. Landlords can also justify raising rents as a result of higher wages, more expensive materials and building materials and general price increases.
A survey from European Public Real Estate Association suggests, however, that the real estate sector does not provide special protection in times of short-term inflation and price pressure. Buying property is also not something that is particularly accessible to many.
– Historically, long-term inflation has been bad news for bonds and equities, while real estate has proven to give investors good protection against rising prices. The picture is more nuanced than that, but with the reopening of the economies, we see that the real estate sector is starting to go in the right direction, says portfolio manager Michael Gobitchek in Skagenfondenes M2 fund to Nettavisen.
Property owners and owners of real estate shares have received proper banking through the corona pandemic. Gobitchek’s M2 fund had a return of -9.4 percent in 2020. However, real estate equities have yielded solid returns in 2021, in line with rising inflation.
– You must remember that the real estate market is local. There are large variations in price and demand depending on where in the world you are looking. When the world now slowly reopens, we see, for example, that the real estate market in the US is currently ahead of the European markets. These include vaccination and political management. That will change soon, says Gobitchek.
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