TAKEAWAYS:
Current inflation rates in the developed world are seriously destroying purchasing power. The worst hit are those in retirement and those planning to retire soon.
In the UK, as an example, the erosion of purchasing power by 50% will take place over 7 years. This is from a position of eroding in half over 28 years only one year earlier.
Fitch estimated Global Inflation at around 7.7% p.a in September 2022.
All financial planning and retirement planning – this century- needs to be reviewed as the previous year's calculations do not make sense.
Counter-intuitively for some- the need to buy assets in falling markets is one of the strongest anti-inflationary strategies.
We look at the failing Russian economy as a guide to changing global economics; property as a leveraged asset class; and an Alternative fund manager with only one negative year in 20 – for counter-inflationary considerations.
The Perfect Storm for retirement planning.
“If its not one thing it’s another”, was a frequent refrain of my mother when multiple issues chose to close in on her. The year 2022 will be marked as an “annus horribilis” for anybody retiring now or soon, and even more starkly for those already retired on fixed incomes. Whilst it has not been down to one thing, one thing stands out as the measurement of what constitutes “horribilis”: inflation, A.K.A- “The cost-of-living crisis”.
An excellent tool for measuring the effect of inflation on purchasing power is “The Rule of 71.8”. Let’s take the UK as an example of an issue eating into the purchasing power of the developed world. In 2021 the inflation rate was 2.52% p.a. Dividing 2.52 into 71.8 suggests that your purchasing power would erode by half over 28-plus years. Given that the average life span of 65-year-olds retiring in the U.S is a further 20 years- than this slow erosion of purchasing power did not cause too much in the way of sleepless nights. Fast-forward to October 2022 and an inflation rate of 10% p.a. – and the definition of “horribilis” takes shape. Our formula suggesting a 50% erosion of purchasing power every seven years!
In short, current inflation rates make a mockery of most of the last 10 years of retirement planning and financial planning. Numbers and projections from the rest of this century simply do not make sense. We must recalibrate. FOR A REVIEW - CLICK HERE.
Buying assets in a world of worries.
The first step to dealing with 2022’s world of worries: get the mindset right. Good financial advice must be to follow the Warren Buffet inflation strategy which is to “buy, buy, buy”. The heart of the problem for the financial planner is one in which he/she is aware that the client/adviser relationship is built on trust. Today, that financial planner is saying:
Trust me- ….you need to be buying assets now.
Even though the calculations we did earlier this century on your retirement needs are now wrong.
Even though the markets I advised you to invest in are currently losing value.
Even though the outlook for the global economy is bleak.
Even though the Russian/Ukraine war remains a dominant and obvious feature in our current world of worries – without any light at the end of that tunnel.
On top of this, many logical and intelligent people find the advice to buy falling asset prices counterintuitive. Surely smart asset managers know when the market is turning and surely, we should only invest when it is clear markets are rising again? Surely? Against this, the financial planner, carrying the burden of the above bullet points, now sticks to the adage “time in the market is better than timing the market”.
Ultimately, the buy, buy buy advice is simple - today's values do not matter when assessing your future purchasing power. Asset values will inflate back upwards. The world must trust what Central Banks did during the Global Financial Crisis –i.e. work together and that will eventually bring inflation under control.
With inflation under control, markets will return to normal and whatever you buy in terms of assets today will be well-placed to combat inflation in a few years time.
The buying options- a quick scan.
At the time of writing all main asset prices are depressed on a Year-To-Date basis, and we refer you back to our recent months of Newsletter in which we have consistently repeated the Mondial Investment mantra which is: for capital – stick with multi-asset managers to manage downside risks; for new money- invest monthly into volatile equity indices to benefit from cost-price averaging over a few years.
To this we add three extra insights to explore with your financial advisor:
Markets- like buying a dog, “its not just for Christmas”.
Sophisticated and experienced investors- get the point that investment outcomes with short-term horizons are better categorized as “speculation”.
Following markets out of their current rut is a task requiring patience. A tough task when valuations are unrewarding.
Asset managers specializing on the chief “risk asset” (equities) must focus much of their attention on today’s value. A matter of current profitability and market conditions. Although last month we quoted Russell Asset Mangers believing that a lot of bad news is already priced in- suggesting a belief that future values might be better.
This month we have added this very interesting video Russia: "Russian Economy will be dead by winter". From Joe Blogs. The narrator is an excellent presenter and economist in his own right. However, this UTUBE segment is drawn from a prominent Russian Economist Vladislav Inozemtsev which heavily suggests that the end of Putin is nigh. When this becomes more obvious the expectations of global economic growth will most likely be restored. Mr. Inozemtsev seems to suggest a sooner rather than a later time horizon.
Property- London; gearing; the pound – and its resemblance to the S&P 500
One asset class which we frequently favour for “gearing/leveraging” purposes is property. Gearing is the process of making money out of someone else’s money- i.e the banks. Given the need for excellent eventual returns to combat inflation- gearing strategies might find extra appeal.
Whilst higher interest rates might mean higher debt management costs- we are talking about investment property so higher rates can be offset to an extent by the tenant’s rent.
In looking at equities- we frequently go to the S&P 500 for recovery solace. Diagram 1 below is a copy of Diagrams 3 and 4 from the September Newsletter which shows the reversion-to-mean recovery potential of the S&P 500 together with stella returns despite the “lost decades”.
Diagram 1: The S&P 500 - Lost decade & returns
For property we pull out UK Property averages in Diagram 2- “UK Property Average Returns”. For places like UK Property- historical graphs provide a similar recovery solace for the property as the S&P 500 does for equities. Indeed, if we take Diagram 3 "Percentage change yearly on UK property (land registry date). The graph suggests a consistent 10% pa return - before the benefits of gearing.
Diagram 2: UK Property Average Returns
Alternative Investments – non-correlated returns.
Whilst Mondial’s Investment philosophy revolves around markets- even when they struggle to impress, they do not constitute the only area of interest.
The Mondial Core philosophy is definitely market centered- but our satellite philosophy covers other investment options.
In Diagram 3 below - which is an extract from the Belmont Monthly Newsletter - Fund results for September 2022.
This is something that experienced investors might wish to bring up with their financial advisers. One of the funds can boast of only one negative year in 20- it has to be worth a look!
Diagram 3: Fund results for September 2022
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For more details, or to contact Sean Kelleher CEO, Mondial Dubai LLC,
please contact us at
+971 56 2228 535