Inflation remains high after the latest announcements, but for now there is no change in the estimates of analysts, who still believe that the phenomenon is transitionary and not permanent.
Of great interest on the subject of inflation are the views of two former central bankers, who have served in times as challenging as they are today and have been called upon to manage major crises. They are the former head of the Fed, Ben Bernanke and the former head of the BoE, Mark Carney.
According to Ben Bernanke, the US economy is showing signs of slowing down due to factors such as the supply chain crisis and rising unemployment, but this is not a cause for concern. Bernanke expects inflation to fall in the range of 2.0% -3.0% over the next 12 months, while unemployment will decline and full employment will be achieved.
According to Bernanke, the latter two will be the most important factors that will lead the Fed to the first interest rate interests. In last week's report, we had identified the above two factors as the most important variables that will determine interest rate increases.
Mark Carney, on the other hand, emphasized the labor market and stressed that it is the one that will determine the future of inflation, perhaps more so than the problems of the supply chain did. Finally, Carney pointed out that when inflation becomes a daily occurrence in the minds of investors, then they will be less concerned about their investment decisions.
Inflation hedging: Depreciation of gold- Stocks are the best alternative
Inflation is an issue that affects markets and investment portfolios. And for this reason, many are in a hurry to protect their investment portfolios against it. There are pitfalls in this process but there are also signs that we must take seriously into consideration.
The chart below shows the returns from April 2020 of key assets which are considered to be the most appropriate hedging tools in periods of rising inflation.
Initially, it is clear that although investors do believe that inflation is a real threat, they have consciously avoided investing in gold. The return on gold is only 5.8% when inflation is at historically high levels. This shows that in the modern investment reality, the investment tools that have been created are more attractive than gold, which is gradually being withdrawn from all the large investment portfolio. The commodities have recorded a big rally but the fact that they remain extremely circular and with large bear markets, justifies the restricted allocation in some aggressive portfolios.
The main conclusion to all of the above is that even in times of inflation, stocks are the best haven for investment portfolios, with composition playing a key role. Stocks are an indirect hedging in inflation periods.
Ιn the early stages of the inflation boom, there may be pressure on stocks as there is disruption from a possible change in monetary policy, but in the long run the returns are positive. Rising inflation is not just happening in the economy. It also happens in stocks. If inflation leads to wage increases (as is the case) employees will have more money available to invest in stocks.
In addition, in times of inflation, large, reputable companies have the power of pricing. That is, their products are so everyday and necessary, that even if they increase prices, it will not affect them negatively. The strength of this strategy is that it is also pushing Value shares up this period and that it is expected to continue to do so in the coming months.
In addition to banks and consumer goods companies, this practice could significantly benefit the badly hit airlines sector. For example, airlines always pass on the cost of increasing fuel to the customer through some extra charge, but passengers do not stop traveling.
If we now add to this that according to a survey by Amadeus, 77% of travelers are looking forward to traveling within 2022, then airline companies are looking forward for the coming months. The period from late October to early November is traditionally a point in time when airlines begin to display buying interest due to the period that follows.
In the fourth quarter we expect that the strong macroeconomic background will be maintained, while after a nervous and with low interest third quarter, we estimate that there are strong chances for a better quarter in terms of returns. The prospects for further reduction of unemployment are expected to maintain increased investment interest but also the general economic and investment sentiment. As we have already mentioned, investors should be selective in their investments and for this reason it is more appropriate to look for one of the existing fully differentiated XSpot Wealth portfolios.