For the third successive meeting the Panel met virtually, in of itself an example of the restrictions that society still faces. The debate focussed on what covid-related impacts will be temporary and which will be longer lasting.
The largest topic for discussion was the possible return of inflation and how best to prepare portfolios if this were to be the case. The increased reach of government into the financial sector was viewed as likely to be a longer lasting consequence of the pandemic (even if the market remains ambivalent, as judged by the state of the bond markets). The historical example of the 1960s was brought up, where inflation reached mid single digits by the end of the decade. As happened then, with increased government influence, central banks may become impotent against political interference and avoid promptly offering up necessary but bitter remedies. At the least it feels worthwhile owning something in portfolios in case inflation were to increase into mid to high single digits once again. For example: historically, indebted businesses with negative working capital have done well during inflationary periods. There was some debate over whether indebtedness would be attractive, as the path through could be quite rocky and leverage adds a risk factor, and all agreed that long-maturity debt with locked-in rates would be by far most preferrable. The ability to pass on price increases is another key feature in this environment.
The Panel also discussed the government stimulus as the start of wealth redistribution, with higher corporate taxes and universal basic income perhaps becoming more prevalent. This already looks a trend across the globe, with examples such as the Biden administration’s stimulus measures, to be paid for with increased taxes of corporates and the rich, or the recent political upheaval in Chile, which has led to the left wing writing a new constitution. The impact of this would be an improvement in living standards for the poorest, an unquestionable positive for society, but must be factored into any assessment of investment holdings. One impact we are already seeing is labour shortages.
The Panel resolved to meet again before the end of the year to continue the discussion.
Peter Hollis, Russell Napier, Ally McKinnon, Glen Finegan and the Kennox investment team.