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I think the science is settled (I’m pretending economics is a science to make a joke, please humour me).
Last year saw something of a row between central bankers, who absolutely insisted that any inflation you could see around was entirely transitory (and would be gone in a matter of months) and the rest of us who weren’t so sure.
Today, consumer prices in the US are rising at 7.5 per cent, the fastest since 1982. In the UK the figure is 5.4 per cent.
That’s frighteningly high. Given how hard it is to imagine central bankers being able to do much about global supply problems, it’s also clearly not very short term. It’s beginning to have an all-too-obvious effect, not just on living costs but on investment portfolios as well.
That’s unlikely to end soon. The market has long preferred fun tech stories and has discouraged oil and gas companies and miners from investing in exploration and production. So they haven’t.
Now we find ourselves in something of a supply crunch: we need more energy, more copper, more lithium and more steel — but none of these things are readily available.
So energy prices are high and rising, as are metals prices. Food prices will soon follow (they are linked to energy prices via fertiliser prices but with a delay due to long-term supermarket contracts with providers).
And this is exactly the kind of environment that leads to bear markets. As Charles Gave of independent research house Gavekal likes to point out, structural bear markets usually begin “when oil is undervalued versus stocks and inflation is accelerating”. If that relationship holds — there could be a clue in the 9 per cent fall in the interest-rate sensitive Nasdaq index so far this year — there is probably a “tough” decade ahead for markets.
All this represents a change of almost paralysing magnitude for anyone used to investing in a long-term low interest rate-driven bull market — one in which even large corrections are more about short-term volatility than long-term loss of capital. Yes, this can happen — see the 1970s.
With that in mind you need to do some things differently. You need, as they like to say in the self-help books, to lean into the problem — invest in the things that are causing the inflation rather than just sitting around waiting to suffer from the consequences.
The first thing on that lean-in list should be yourself. For the last few decades you have probably felt no particular need to get huffy about your pay. You’ve assumed inflation will knock around 1-2 per cent and you’ve known that the prices of manufactured goods and technology in particular have been falling, so as long as you get the odd promotion, all good.
Not so any more. The real value of your income is falling every day. Earn £50,000 today, do nothing and if inflation runs at 6 per cent a year for five years your purchasing power will have fallen to the equivalent of £37,360 today. Central bank governor Andrew Bailey has asked that people refrain from asking for large pay rises. He has a point — in that if everyone asks for an increase we could find ourselves in a nasty wage prices spiral — as in the 1970s.
But I’m afraid everyone else is going to ignore him — and you probably should too — note that trade union membership in the UK is rising. If other people’s wages are going to be part of the inflation problem, making sure your own wages keep pace is part of your inflation solution.
The second thing on the list has to be your investments in resources: again it is energy and metals prices that are causing much of the inflation — so you need to lean in to them.
Own the problem — preferably in the form of profitable companies which will pay out real money in real dividends. In inflationary times you need returns that beat inflation a lot more than you need fun story stocks.
I’ve been nagging you to buy big oil and mining in the UK for some time, so I am not going to go on about Shell and BP (except to say that they are not the enemy and that their average yield is 4 per cent, which is nice) or BHP, Anglo American and Rio Tinto (also not the enemy and offering an average of 6.8 per cent).
Instead, I’m going to suggest some smaller names — the good news is that the UK, long considered to be too resources grubby and Brexity for international investors to consider, has hordes of profitable income-producing dividend-paying resources companies that should suit you down to the ground if you are happy to add a little more risk to your portfolio.
On the oil side you might look at i3 Energy. Anna Macdonald, a fund manager at Amati, points to its secure operations in Canada, its expected yield this year of nearly 6 per cent and its recent announcement that it is to move to paying monthly dividends to “expedite the return of capital to its shareholders, enabling potential reinvestment and improved returns during a time of market strengthening”.
I like the sound of that. You might also look at Atalaya Mining. I suggested this around this time last year and it is up 40 per cent since. Still, it’s probably worth hanging on to it as it has a 5.4 per cent yield and exposure to stable copper production, in a low-risk jurisdiction (Spain).
You can make yourself feel better about owning mining companies by thinking of this as “energy transition exposure”.
The resource analysts at Berenberg like Atalaya too, calling it copper without political risk. But they also suggest some other interesting ideas. Kenmare Resources is a mineral sands miner with an operation in Mozambique and a policy of paying out a minimum of 20 per cent of after-tax profits in dividends. It is, says Berenberg, “a well-established income stock” on a yield of currently 5.5 per cent. With supply tight and prices rising that is unlikely to change.
Polymetal comes with a little extra inflation protection built in, as it’s a gold and silver miner. But it also has some extra risk since its operations are in Russia and Kazakhstan, something reflected in its 8 per cent yield.
Finally of interest might be Pan African Resources, a middle-sized gold miner yielding 6.1 per cent, with relatively low debt levels and a portfolio of operations in South Africa.
Not everyone wants the risks of holding individual stocks of course. If you want to make your leaning in rather more one-stop shop — and large cap — try the BlackRock World Mining Trust. It yields around 4 per cent and gives you good exposure to the whole mining sector — with a bias towards copper and gold.
I particularly like the latter. If there is any part of the argument around market performance that is settled at all it is surely that over the very long-term gold is one thing you can rely on to hold its value. Best to have some.
Merryn Somerset Webb is editor-in-chief of MoneyWeek. The views expressed are personal; merryn@ft.com; Twitter: @MerrynSW. She has holdings in Shell, BP, BHP, Rio Tinto, Anglo American and BlackRock World Mining Trust
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