For months, the debate over inflation has been the main topic of discussion both in the Media and in the majority of investment researches of investment banks.
For months the main concern is whether inflation is temporary (transitory) or permanent. Actually no one so far has given a clear and definitive answer. Because it is difficult for someone to give this answer no matter how many scenarios are processed. Because it has never been easy to predict a macroeconomic situation.
So what we need to do is put aside any effort to estimate future inflation and focus on what the substance is: if inflation ultimately remains high, how should investment portfolios be formed to profit from it?
The answer is not one-dimensional, as it requires us to answer in addition to the basic question and another sub-question: how much will inflation rise? History has shown that both low inflation and extremely high inflation can have similar effects on equities. However, the final conclusion is that even in an inflationary environment with inflation at 3% -5%, the average return on equities is 11.2% and on bonds 6.1%. Therefore, we focus on where we need to: the composition of the portfolios.
The inflation in relation to the economic cycle shows that value stocks and cyclical stocks perform better in the inflation range of 3% -5% described above.
1. Value stocks have two main characteristics that make them attractive in these periods.Value companies are companies with a long history and products for which demand can not be significantly reduced. In addition, they have the power to pass on price increases to the final consumer and thus not only come out of it without a scratch but ultimately have higher revenues.
2. Value companies have lower P/E indicator and thus are less sensitive to the possible rise in interest rates, which usually are the measure against inflation.