by Welcome back to Traders Ideology, In this article, we’re going to discuss how to invest during inflation and how to tackle inflation.
In the last few days, there have been a lot of concerns about inflation in different markets of the world. Inflation in the USA has hit a 40-year high and retail inflation in India has touched 6.95%. In such a situation, it’s a concern for investors what will be the impact of high inflation on the equity market and other asset classes? In today’s special edition of “Viral React”, we will talk about inflation where we find out the views of 3 famous experts on inflation.
How to tackle inflation? | How to invest during inflation?
In today’s article, we will see the views of the following experts that how they are going to invest during inflation and how to tackle inflation by them are as follows:
Bill Ackman: the founder/CEO of Pershing Square Capital Management, a hedge fund company.
Ashwath Damodaran: Professor of Finance at New York University’s Stern School of Business. He teaches core subjects such as Corporate Finance and Equity Valuation.
Warren Buffett: Who is the Chairman/CEO of Berkshire Hathaway and also the world’s most famous value investor?
Bill Ackman’s reasons behind record inflation
- 5 months ago Bill Ackman talks about the reason behind record inflation and how to invest During Inflation.
- Bill Ackman is telling that the US government took a favorable monetary stance to reduce the economic loss caused due to COVID-19 pandemic concerning jobs and wages.
- As part of a conservative monetary policy, the US Fed has kept the benchmark interest rate low to keep liquidity high in the US economy.
- It pumped additional cash into the economy and spurred economic activity and business.
- Governments around the world have also passed different stimulus packages that include massive public spending and unemployment benefits.
- For example, dollars were transferred directly to citizens’ bank accounts by the US government.
- Moreover, due to the rapid vaccination of COVID-19, people are coming out of their homes and normalcy has started returning.
- People had made significant savings during this period and all markets, especially the equity markets, were also performing well.
- In such a situation, people had extra capital to spend, due to which the demand started rising very fast.
- But the supply remained limited in comparison.
- In many cases, the supply chain issues that emerged due to the pandemic were not fully resolved, leading to rapid price inflation in those industries.
- The biggest example of this is the semiconductor chips industry.
- In addition, the Russia-Ukraine War also resulted in inflation in energy, gas, and oil prices globally, affecting the overall global economy and trade.
Professor Aswath Damodaran
- Professor Aswath Damodaran explains in the brief what are the effects of inflation and how to invest During Inflation.
- Professor Damodaran explains that in his view rising interest rates should not harm the economy if the economy is strong.
- If this is not the case, then the effect of high inflation on the overall economy can be huge.
- If the benchmark interest rates are raised to check high inflation, it will have a major impact on the stock market and correction can be seen in many stocks.
- Businesses that sell physical goods and products such as commodity companies can do well in times of inflation.
- Also, FMCG companies – those with the pricing power – can also do well.
- Because they have the power to pass on their increasing input cost to the customers.
- But financial assets such as bonds and financial companies are hit hard by inflation and real estate suffers as well.
- Here Professor Damodaran has made a fascinating point that there is no right solution to high inflation.
- But in inflation following a sustained bull run, if short-term losses occur, investors can offset those with their long-term gains.
- Now listen to the third clip where Professor Damodaran explains the impact of inflation on different asset classes with historical data.
- In his interview, Professor Damodaran talks about nominal returns and real returns.
- The mathematically calculated return formula is the investment profit divided by the initial purchase price, also known as the nominal return.
- Real return is calculated by subtracting inflation from nominal return.
- That is, from the real return we get to know that the actual organic growth inflation in your investment is taken into account.
- Stock returns are not correlated with inflation as stock returns have been down in some high inflationary periods and up in others.
- But the relationship of fixed income asset class with inflation is evident.
- Returns of fixed income asset classes tend to be lower during periods of higher than expected inflation,
- and returns of asset classes issued with less than expected inflation are up.
- Overall, financial asset classes such as equities and fixed income don’t get damaged by rising inflation
- And returns of fixed income classes have a major downward effect on rising inflation.
- Then Ashwath Damodaran talks about gold and real estate.
- As per past data, gold as an asset class has acted as a hedge over the years.
- Professor Damodaran points out that if there were problems in the world economy like in the 1970s, 2007-09, and 2020, gold has given good returns.
- Gold does not give us positive real returns, hence gold cannot be considered a full hedge against inflation.
- Looking at the same historical data, we cannot conclude any direct working link between real estate to inflation.
- The professor also says that apart from inflation in real asset classes such as gold and real estate, other external factors such as the overall state of the world economy have had a more significant impact.
Warren Buffet about Inflation
- Warren Buffett explains how to invest during inflation, what his investment strategy is to tackle inflation.
- Warren Buffett explains that in times of high inflation, businesses do well that require working capital to sustain growth
- And have the pricing power to sell their products at higher market prices.
- In the first point, Warren Buffett states that companies that need limited capital to maintain their growth momentum will do well in times of inflation.
- This is because, in times of high inflation, companies’ input costs and borrowing costs increase.
- During this, companies that use the least capital and increase their sales should maintain their profits.
- So, in short, you should look for companies that have a higher scalability scope.
- The second statement shows that companies that have economic MOATs enjoy higher pricing power.
- These companies have been able to do well in times of high inflation as they offset their rising input costs by rising prices of their products and services.
- It can pass on its costs directly to the consumer, which doesn’t affect its margins.
- So takes the high inflation scenario of Bill Ackman, Professor Aswath Damodaran, and Warren Buffett.
- Through this article, we try to give you a fresh perspective to enhance your understanding of financial markets.
- What are your views regarding inflation and investment in such times, tell us in the comments, and do not forget to share with your colleagues.
- Hope you like the article on how to invest during inflation and how to tackle inflation.
- We will bring more such interesting articles for you very soon. Happy investing.
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