Rampant inflation is showing no sign of abatement. In fact, the Bank of England recently raised its forecast for consumer prices index inflation from a 10pc peak to an 11pc high by the end of the year.
In Questor’s view the Bank’s ability to forecast inflation is questionable. It has continually been behind the inflation curve over recent months and has raised its forecasts several times since the start of the year. Therefore, this column would be unsurprised if inflation overshot 11pc by the end of the year.
Despite a further rise in its inflation forecast, the Bank’s Monetary Policy Committee decided to increase interest rates by just a quarter of a percentage point at its last meeting in mid-June. Although three of its nine members voted for a half percentage point increase, they were outvoted by their less hawkish peers.
Clearly, Threadneedle Street is seeking to balance the prospects for the economy with dampening an extreme rate of inflation. Indeed, a rapid rise in interest rates would not be conducive to strong economic performance. And with interest rate changes generally having time lags of many months, it could be argued that even a rise in rates now would fail to dampen inflation by the end of the year.
However, the Bank’s relatively dovish stance compared with its counterparts at America’s Federal Reserve, who recently raised interest rates by three quarters of a percentage point, indicates that it is acting in a constrained manner to a burgeoning inflation problem.
In terms of portfolio management, a combination of high inflation, rising interest rates and a slowing economic outlook presents major challenges for investors. Stocks markets have fallen over recent weeks as investors price in uncertain conditions. As a result, our Wealth Preserver portfolio’s 20pc weighting to shares has been a drag on its performance.
Overall, our equity holdings have failed by 21pc since purchase last summer. We still expect stocks such as Diageo and WH Smith to generate inflation-beating returns in the long run, but we are less sanguine about their short-term prospects.
Gold continues to generate a positive return for the portfolio. It is currently 17pc to the good since being purchased in April last year, although much of this is due to favorable currency movements during a period of dollar strength. Gold’s near-term prospects will be inhibited by rapidly rising US interest rates, which increase the appeal of income-producing assets on a relative basis.
But the precious metal’s inflation-beating potential, and defensive attributes, mean its 10pc portfolio weighting is maintained.
Elsewhere, the performance of our commodity holdings and property/infrastructure investments has thus far proved to be a mixed bag. An uncertain economic outlook may hold back the former in the short run, but the long-term prospects for miners such as Antofagasta remain upbeat. And with ambitious net zero policies likely to remain in place despite energy market turbulence, the capacity for Greencoat UK Wind to generate above-inflation returns remains.
Update: Urban Logistics Reit
“Last mile” warehouse owner Urban Logistics Reit released annual results last week. They demonstrated encouraging progress; its recent raising of capital has enabled it to rapidly expand its portfolio through acquisition.