Inflation has been on a bit of a gallop recently. I’ve found it difficult to avoid rising prices with many purchases. So, as an investor in UK shares, should I worry? There are a few ‘ifs’ and ‘buts’ to consider before answering that question.
Rampant inflation isn’t certain
For example, high and accelerating 1970’s-style inflation can make it difficult for businesses to keep up. So short-term profits could fall in real terms and act as a drag on share prices.
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However, even under high-inflation conditions stocks can be a decent place to invest money over the long term if the underlying businesses can raise their selling prices.
But inflation doesn’t worry me. The mood music from governments on both sides of the Atlantic sounds as if they think the recent spurt in inflation may prove to be transitory. Neither the US nor the UK has plans for a rapid ramp-up of interest rates to fight inflation.
In May, the Bank of England’s Monetary Policy Committee predicted Consumer Price Index (CPI) inflation will be somewhere close to its 2% target as far ahead as the middle of 2022. And the government set the 2% level for a reason — modest inflation tends to stimulate economic activity.
But if inflation does gain traction, the traditional advice is to turn to assets such as gold, commodities, property and bonds. But I’ll not be bothering with those. Prices are hard to predict. And gold and commodities, for example, have already been riding high for some time.
It’s easy to get on the wrong side of a trade when investing in vehicles that simply track prices. After all, gold, commodities and property prices tend to cycle up and down.
UK shares — so often the answer
But if I do want to try to build some inflation protection into my portfolio I can do it with UK shares. For example, gold mining companies will likely benefit from rising gold prices. So, I’d consider companies such as Centamin and Shanta Gold.
And the big general mining firms could receive a boost from rising commodity prices, so I’d look at Anglo American, Rio Tinto and BHP.
Meanwhile, the many property companies listed on the London Stock Market strike me as a great alternative to investing directly in bricks and mortar. An investor will be exposed to the potential for capital gains from a rising share. And there’s the possibility of an expanding income from shareholder dividends.
Those potential benefits, and the downside risks, are similar to those gained from holding property. I’d consider property stocks such as Warehouse REIT and Tritax Big Box REIT.
However, even with the possibility of rising inflation ahead, the solution for my long-term portfolio is the same as it’s always been.
I’d aim to pick the best stocks from multiple sectors including those I’ve mentioned — sectors such as pharmaceuticals & health, fast-moving consumer goods, utilities, retail, technology, software, IT and others.
My belief is a portfolio of quality UK shares diversified between industries will likely provide a decent long-term return whatever inflation happens to be doing.
However, nothing is certain or guaranteed. And it’s still possible for me to lose money on shares despite such an approach.