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JG out for lunch today with a client – got me thinking about a few things

I had lunch with a good client / family friend today and the topic got onto inflation as the potential for derailing this current market rally, the second investor I’ve spoken to today to bring up that very topic. Before I discuss, some context about today’s lunch.  I was made redundant during the GFC from a trading position that paid a nice salary. With clearly no jobs in the trading business on offer, I took a position that included a desk in the city, a computer with a trading terminal and a phone to bring in clients. No salary but a generous split of what I earnt. John was one of a handful of people who originally backed me, something I’ll never forget. The first year or two were very lean, however building a business in the GFC was actually a god send. I’ve always tried to be a pragmatic portfolio manager, calling it as it is, and that seemed to resonate through this difficult period. It’s the approach that I hope comes through with Market Matters on a daily basis. The rest is history!

While it’s nice to look back, and clearly our history shapes us, as investors we’re all about looking forward and navigating what comes next. The concept of rising inflation derailing the equity market as central banks are forced to raise rates sooner, and more aggressively than they’d like is a risk that John highlighted today and one that we’ve written about, however in MM’s view, we’re not there yet. We think central banks will let inflation run hotter than they otherwise would, and given the backdrop of huge piles of stimulus and historically low rates, we think there is more to go before this becomes a headwind. The next obvious part to this is what to own in an inflationary environment?

In an inflationary environment, we want to own real assets with the most obvious sector being resources which we remain bullish on. Another key area is asset managers and this brings into play a holding we have in the Income Portfolio, namely IOOF (IFL). This is a company in turnaround mode, we’ve spoken at length around our investment thesis in the past (click here to view past discussion), however todays ~7% rally and breakout of it’s current trading range has brought this position back into focus. The platform providers also fit this bill (HUB, NWL, PPS), as assets appreciate, so to do their earnings, they also make a spread on cash which further supports earnings. We hold HUB 24 (HUB) and Praemium (PPS) in the Growth and Emerging Companies Portfolios respectively.

While MM thinks inflation is rising, we don’t think it will derail equity markets (yet).

IFL
MM remains long and bullish IFL
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