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Will rising inflation encourage investors to take more risks?

Topic: Investing

For an example of an unpredictable year compressed into one moment, you need not look much further than the great Marmite shortage of 2016.

In hindsight, we should have seen it coming. Britain had just voted to leave the EU, the pound plummeted and inflation (the increase in price of goods and services) hit its highest level in two years. The inevitable result was that products and ingredients being shipped into the UK started to look a little bit more expensive.

When Tesco announced it would no longer be stocking Marmite following the referendum, due to a hefty price increase from supplier Unilever, there was a national uproar. Rare jars of marmite were being sold on Ebay for up to £5000. Panic set in.

The crisis has now been averted and we can all sleep at night again, but it’s difficult to ignore the ramifications of this moment. Currency movements have always had a real impact on the price of goods and, whilst it’s fair to say that many High Street shops have absorbed the costs for the sake of Christmas sales, things are likely to get pricier in 2017.

The Bank of England expects inflation to rise from 1% in 2016 to 2.7% next year. This means that any cash sitting in your bank account is likely to be gradually eroded in real terms, as there currently aren’t any savings accounts paying that level of interest. This is probably not news to you. Like a punch-drunk fighter on the ropes, savers have been taking it on the chin for a while now, but what does it mean for investors?

Click & Invest’s Head of Investment Management, Richard Fullman, believes that safe bets like bonds are also looking less attractive: “Looking back at the second half of 2016, it’s clear that traditionally low risk investments such as bonds have started to lose value, whilst riskier options like equities have gained in value.”

Bonds work like a loan. You hand over your money, usually to a large organisation or the government for a fixed term. Throughout the term you get regular interest payments and after a few years you get your original money back. However rising inflation makes some bonds less attractive, as the payments they make do not adjust for inflation.

One reason why equities or shares are currently looking more exciting than a lot of bonds is that they can handle inflation better. And if companies react to inflation by raising their prices and boosting their earnings, then shareholders could get a slice of that profit.

So with cash in the dog house, bonds flat-lining and the global political rulebook being re-written with every new election, is it time for investors to roll up their sleeves and get stuck into the stock market?

“At a time of low interest rates and high inflation, investors may have to take on more risk,” Richard says. “The important point to remember is that there are a number of other economic factors that also need to be taken into consideration, such as the potential impact of monetary and fiscal policy and the strengthening dollar.”

In these circumstances, having a team of researchers and analysts in your corner is invaluable. Investec has a number of specialists that will look at your attitude to risk and capacity for loss before offering over 180 years of experienced investment expertise to help you respond effectively to rising inflation and other uncertainties in 2017. To subscribe to the Click & Invest newsletter and receive monthly updates, click here.

The information in this article is for private circulation and is believed to be correct but cannot be guaranteed. Opinions, interpretations and conclusions represent our judgement as of this date and are subject to change. The information contained in this article does not constitute a personal recommendation and the investment or investment services referred to may not be suitable for all investors; therefore we strongly recommend you consult your Professional Adviser before taking any action. Copyright: Investec Click & Invest Limited. Reproduction prohibited without permission.

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