Rising inflation set to help the next super cycle for investors

By Cameron Micallef

August 09 2021
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Central banks around the world are largely tipped to increase interest rates over the medium term due to inflationary pressures, with investors urged to look at the upcoming growth cycles that will emerge post-COVID-19.

Warren Buffett famously said when rates are zero, all shares look cheap.

And while a recent eToro study showed investors fear inflation’s impact on their portfolio more than anything else, a recent webinar hosted by Antipodes founder and lead portfolio manager Jacob Mitchell suggested a lift in inflation could actually birth plentiful opportunities for investors.

In fact, Mr Mitchell described a gentle turning point to the economy, as the governments’ reduced support was offset by greater consumer spending brought on by lockdowns and an increase in saving rates.

“We think inevitably the cycle must moderate, and while I think going into next year the excess growth [in the economy] will slow, the excess savings do give protections to a hard landing,” he explained.

While inflation expectations moving forward have normalised, Mr Mitchell pointed out that structural shifts in the world including the rising cost of China’s manufacturing and an ageing population, or a reduction in people in the workforce, are two likely reasons inflation will pick up worldwide.

But it is the way the markets respond to these inflationary pressures that will largely shape what happens next.

Mr Mitchell believes “we are in good shape for an ongoing rotation in the market out of very high multiple stocks into lower multiple stocks”.

“While we don’t think it will be smooth, we ultimately think it will happen,” he said.

Looking forward, the investor said new emerging investment cycles will be the main driving force behind various stock options.

“We see three areas where both the government and businesses are spending money. The key one, predominantly in Europe and China, is the commitment to decarbonisation; that will be a super cycle in investment,” he continued.

“Cyclical that are transitioning to secular growth, these are the companies that are going to benefit from emerging investment cycles.”

The investor also highlighted the ongoing investment cycles around cloud computing, 5G and the internet of things as tailwinds for investors.

Moreover, he believes investment cycles linked to social infrastructure will emerge, such as upgrades to the healthcare sector after weaknesses were identified due to COVID-19.

Regions or countries around the world that can kickstart this investment cycle include Asia and Europe, with Mr Mitchell confident they will provide particular opportunities for investors moving forward.

“Interesting enough, that is also the part of the world that is trading at a record discount compared with the US,” he said.

The investor also pointed to companies that are “resilient cyclicals with pricing power” — companies that have benefited from reopening.

“As you know, reopening has come in different forms and different speeds around the world, led arguably by the US, where consumption in the services sector has recovered strongly,” Mr Mitchell said.

“We think in the US there will be ongoing good growth in any housing-related parts in the consumption mix.”

Additionally, supply issues and pent-up demand should act as a tailwind for the automotive industry, Mr Mitchell said.

But he has high hopes for the financial sector, too, noting it has also been “a good way to play reopening”, although highlighted the strength of European and Asian shares over the US.

Finally, Mr Mitchell pointed to high-growth stocks that are on low multiples relative to that growth.

“In the case of Facebook and Microsoft, they have certainly done well during COVID but have come out of COVID in pretty good shape,” he said.

“The market, I think, has been slow to recognise the long run of growth these companies have ahead.”

About the author

Cameron Micallef

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron Micallef

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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