How can we protect ourselves from the erosion of higher prices on our spending power and maintain the value of our savings? What about income from investments to offset inflation?
High levels of inflation are typically accompanied by economic decline. Many industries have boosted wages to protect against industrial action and labour shortages. This tends to be a short-term response, as unless high levels of inflation become embedded in the system, managers will attempt to retake control of costs to remain competitive. In addition, investment into automation and AI are likely to increase productivity and gradually reduce labour shortages and wage pressures. Nevertheless, inflation is proving slow to diminish and it may be some time before it returns below the 2% target.
The impact of a prolonged period or a sharp rise in inflation can be devastating for savers. Evidence of this is still clear in some parts of Europe and in many South American and African countries. At home, short-term interest rates of over 5% may feel like a safe haven, but already trying to lock this in for a meaningful period is proving more difficult. In addition, once the bonds are purchased the dividend will not increase and will suffer the full impact of inflation over time.
Gold Bugs are never shy about claiming all sort of attributes to the precious metal, including a hedge against inflation, but we have always struggled with its absence of yield and their ability to say what fair value looks like.
In our opinion, one of the best defences is a business that has pricing power; that is it experiences steady demand even when prices rise (inelastic pricing in economists’ jargon). Companies offering new and innovative products that help their clients resolve problems also tend to have strong pricing power. These businesses are more able to pass on rising costs onto their customers, without materially affecting demand.
Businesses with these characteristics, or the ability to grow revenues, profits and cash flows over the longer-term are also able to fund progressive dividends.
Within the WS Saracen Global Income and Growth portfolio we aim to identify high quality companies with attractive prospects and to purchase their shares at attractive prices and hold for the longer-term. We have not invested in higher yielding shares to chase dividends, as many are too highly geared for our comfort and may face some challenging refinancing decisions. Where we are invested, it is in many businesses that are investing heavily to improve their, or their customers efficiency, use more recycled products, automate and produce fewer harmful emissions.
Our fund has a strong starting position to deliver the income growth needed to offset inflation. We expect our holdings to earn higher returns on their investments, promoting faster growth, cash generation and further dividend progression.
What about Global Income and Growth cash returns?
