Holly's Blog: Stagflation ahoy?

Stagflation ahoy?

This week the media substituted the word ‘diesel’ for ‘gas’ and redirected their column inches here. Wholesale gas prices have gone through the poorly insulated roof and are about 7 times higher than they were last year. Energy suppliers have gone bust. And the winter is looking quite expensive.

On Wednesday Putin eased gas prices by indicating that Russia would boost supplies to Europe. Hmm. You know all is not well in the world when you realise that Vladimir Putin has a say in how much your monthly fuel bill will cost. It’s hard to feel anything but a cold chill when a 69-year-old man prone to bare-chested horse-riding photo opportunities has any control over your household finances.

Markets are rattled by some pretty gloomy mood music. Potential contagion from the Chinese property developer Evergrande is still a very real threat. Covid repeat-to-fade. Power outages, supply chain disruption, shortages on the shelves, energy providers going bust, labour shortages…blah blah miserable blah…...

And there’s a new word creeping into the papers and even our Google searches. Stagflation.

Stag-what?

Stagflation is something which logically should not exist. It’s what happens when prices go up at the same time as the economy stutters, growth slows and unemployment rises. Normally, prices and wages go up when everything is charging ahead at full-steam. So what’s going on?

First up, inflation is currently heading up faster than it normally does when we turn a corner and things start to pick up. Wages are going up. You don’t need to be an economist to see this. I looked at a job ad this morning for an HGV driver paying £50,220. A few waitressing jobs paying £29,000 a year plus a £1,500 sign-on bonus. It’s hard to find staff.

Globally, there is also cash knocking about which consumers can spend. I read an economist’s estimate this week that US households have over $3 trillion more cash in bank accounts today than they would have had without the pandemic.

So money is flowing in to the economy. We’re spending and (if we can work) we’re earning. But this is not enough nor sustainable. Supply chain disruptions hurt businesses. Coronavirus impacts people being available to work. Increased energy prices mean it costs more to make stuff. And businesses get rattled and pass higher costs on to consumers. (What did you pay for fuel last week if you managed to get any?) People ask for higher wages (see waitress sign-on bonus above). So prices go up but businesses struggle.

Woe is me

Well not entirely. There are some things we can do.

Cash really is a pretty bad home for long-term savings now. You are literally going backwards. We all need a cash buffer but do shop around for the best available rates and think very clearly about how much you need to keep in cash.

As for investments, I’ll highlight 2 things today.

1. Be Global!

I think it’s important to make sure we’re all thinking globally and not sticking to the ‘home’ bias of the UK like a comfort blanket. There are plenty of cheap, good ‘ETFs ’ out there which get you one-stop exposure to global markets such as the S&P 500. Or I’ve always held the HSBC American Index fund. Thinking broader than the US, what about a low-cost multi-asset fund which invests globally – look at the Vanguard LifeStrategy range or I quite like the BMO Sustainable MAP range of funds. These are very simple ways to get a good spread

2. If you’re paying for spice – get spice!

Once you have these basic staples in place, you can think about adding a bit of colour and movement with some very actively managed funds which back growth. There will always be companies which do well because they make good things, which people want, at a profit. Whatever the economic environment.

If you are paying an expensive fund manager, make sure they are earning their money and not just dithering and hedging their bets. An interesting thing to look out for if you manage your own portfolios and pick your own funds is a figure called the ‘Active Share’. The basic idea here is that it’s cheap to run an index fund. If you pay a fund manager more, it’s because you want skill and decisiveness. A very high Active Share means that a fund manager is very different to the index and has big holdings in shares which may be very small parts of an index. They’re making big and hopefully informed bets. Which is what you’re paying for. DIY investor darling Terry Smith who has “No index hugging” as a brand promise, has an active share of 90% in his main fund.

As a rule of thumb, having an active share of less than 80% is a bit like a skinny decaf latte. Why bother? Not if you are paying more than 0.5% a year for this. Have a look. Not always a fool proof measure but in times of inflation and stagflation and indeed any-flation , you don’t need weedy expensive funds in your portfolio.

Have a lovely weekend all.

Holly