{"text":[[{"start":6.5,"text":"The writer is head of multi asset at Royal London Asset Management, an investor in commodities"}],[{"start":12.65,"text":"Investors are suffering cognitive dissonance on the topic of inflation. We have been in a seemingly intractable 1970s-style energy crisis that has the power to trigger a wage-price spiral and push the world into recession. "}],[{"start":27.3,"text":"At the same time, the AI revolution is promising to replace large swaths of the workforce, boosting profits and keeping inflation low. Some investors may shrug as a result. The world economy is a complex system and there will always be some prices rising while others fall. "}],[{"start":45.150000000000006,"text":"It’s a matter of time horizon. The recent rout in government bonds is a reminder that forces pushing inflation higher from the Middle East crisis are operating here and now. Central banks may be forced to rein in economic activity. "}],[{"start":60.00000000000001,"text":"As the dotcom boom showed, technology investments are not immune to a downturn, however significant their eventual impact on productivity. In a period of spiky inflation, investors need to hedge stock and bond portfolios with a broad basket of commodities and be prepared for shorter, more violent business cycles as interest rates rise and fall."}],[{"start":81.7,"text":"Low and stable inflation has been the norm in developed countries, but there were periods of high inflation around the two world wars and in the 1970s. The Saudi spot oil price more than quadrupled after the Yom Kippur war, before tripling during the Iranian Revolution. "}],[{"start":99.2,"text":"The pandemic marked the start of a similar regime, with de-globalisation, geopolitical instability and excessive government debt making developed economies vulnerable to price shocks. The first came when wartime levels of stimulus were left in place far too long in the post-Covid reopening. "}],[{"start":null,"text":"
"}],[{"start":118.30000000000001,"text":"The second is once again centred on Iran with the shock to crude supplies from the closure of the Strait of Hormuz and attacks on energy facilities. While investors wait for a resolution of the conflict between the US and Iran, much damage is being done to global supply chains. This puts central banks in a quandary. They should raise interest rates to fight inflation, but history has shown them unwilling or unable to reverse a large and unexpected increase in prices."}],[{"start":147.8,"text":"This is part of a familiar pattern. Two-thirds of the time since 1915, UK inflation has been in a low, stable regime with retail prices rising an average 2 per cent a year. One-third of the time, inflation has averaged 10 per cent, coming in the form of one or more distinct price-level shocks that cause the annual rate of inflation to rise. While specific countries have suffered high and even hyperinflation, these periods of “spikeflation” have been global in nature with a similar phenomenon visible everywhere."}],[{"start":181.05,"text":"Investment returns are heavily influenced by the inflation regime, as you might expect. Financial assets perform best when inflation is falling. My analysis of a dataset from economist Robert Shiller suggests US stocks have beaten inflation by an average of 10 per cent a year during the low-inflation years, with Treasury bonds posting a respectable return of 4 per cent a year in excess of inflation. In periods of spikeflation, US stocks have gained less than 2 per cent a year in real terms, while Treasury bonds have lost 2 per cent a year on the same basis."}],[{"start":214.85000000000002,"text":"In many respects, the period since April 2020 has been typical of spikeflation. Government bonds have suffered even greater losses than usual, given the near-zero starting point for yields, with US Treasuries down almost 9 per cent a year in real terms. Equity market returns have been far from disappointing, however. The S&P 500 has delivered an average real return of 14 per cent a year and the index is making new highs despite hostilities in the Middle East."}],[{"start":246.50000000000003,"text":"The period of higher inflation has coincided with a wave of AI-related earnings supporting the US market. For the time being, a strategy weighted towards energy, commodities and technology stocks is performing well, but with oil inventories declining at an alarming rate, something has to give. "}],[{"start":265.35,"text":"A peace deal that started the flow of oil again could allow markets to look through a “transitory” rise in inflation. We heard the same language in 2021, however, and central banks may again find themselves behind the curve, scrambling to catch up as high inflation persists. "}],[{"start":280.85,"text":"Diversification is the first defence against uncertainty and investors should include real-time hedges against inflation such as commodities in their portfolios. An active approach to tactical asset allocation will be more important than ever as geopolitical risk ebbs and flows and the world economy swings between boom and bust."}],[{"start":308.3,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1780644858_6992.mp3"}