It’s no surprise that Covid-19 will have far-reaching consequences for the global purse.  The pandemic has already changed our spending habits. Saving is back in fashion – although largely because we haven’t really had anything to spend our money on! There were record saving levels in 2020 and predictions are that we’ll squirrel away £164 billion this year. But of course, you don’t have to be a financial wizard to work out that we’re probably also gearing up for a period of inflation. 

If that’s the case, what will that mean for your money, and is there anything you can do to protect it? I tuned into a recent Money Week podcast where Merryn Somerset Webb was in discussion with Peter Spiller of the Capital Gearing Trust. She was attempting to double-guess the future of our finances and find out if Peter had any top tactics if inflation does rise steeply over the next year or two. 

A man in the thick of it

Peter Spiller has managed his company since 1982 so he’s seen a lot of ups and downs in the market. It’s run as an employee ownership trust, just like John Lewis. That means it will always belong to the employees and is very unlikely to be taken over by a larger firm – something that gives it a lot of stability. The trust aims to provide a service to clients with a long term investment horizon, a total return mindset and a marked aversion to losing money in the short term. Since 1982 there was one year that ended down 2%, but the share prices have been up 220 times over that period. So it seems to be a system that works. 

Merryn asked Peter how his business had coped with everything over the past year and he said, “It has been quite remarkable. No one could have predicted the Coronavirus – or prepared for it. We were lucky that markets at the end of 2019 looked frothy. The price of renewable infrastructure in particular, did very well over the Xmas period and into January 2020 and premiums got to very high levels – so we sold them all. As a result, we went into the end of February with risk assets at a level of 33%. That concerned us. We wondered what we could do with that money. Luckily plenty of opportunities opened up over the following month and we were able to put quite a lot of that money to work.”

The company was concerned that the economy would take a real downturn, but happily, the response around the world was quite positive and that didn’t happen. So Peter put money into investment trusts that were well run, had redemption features – and were going ridiculously cheap. Like Pershing Square, a hedge fund run by Bill Wright. 

How can we win now?

At a time when everything is looking a bit expensive, Peter was asked where our money should be going now? He said, “Where prospective returns are good and risk is low, you want to lock in those returns for as long as possible. In 1982 when markets were remarkably cheap, real interest rates were high and inflation was high but falling, we were 100% in equities at that stage and it worked really well.”

“Fast forward to today, and the long term outlook for equities is very poor – and the long term return from nominal bonds negligible. And with inflation in the wings, that’s a bit of a problem. So the system of 60/40 splits between equities and bonds, which has worked so well over the years, is broken. Because bonds if they yield nothing to begin with, have no room to show capital appreciation to offset equity falls.” 

“Now I would go with 60% equities and 40% index-linked bonds. Index-linked bonds benefit from the fact they have no negative yields that can get quite big in conditions of financial repression, which we will definitely have. That’s where we are at the moment.”

Timing is everything 

So the million-dollar question is, when will we see the first signs of inflation and how high is it likely to go? Peter thinks that’s likely to happen as soon as the economy emerges from restrictions and people start spending again. And especially as the service industry is likely to see a sharp rise in demand, coupled with falling capacity if social distancing still has to be factored in. And just like the inflation patterns of the early 60’s he believes it will rise slowly at around 1.5% a year – although monetary analysis suggests it could be more like 2%. I guess we’ll just have to wait and see. 

Get ready for the future

If you want to review your investments and see how well they might cope with inflation, please feel free to give us a call on 01372 365950.