The Lemon Fool

stockton wrote:As to which stocks to buy, my recollection is that supermarkets and property have proven to be effective inflation hedges in the past.

Do you have any evidence for that?

For instance RPI has risen 31% in the last 10 years. Tesco shares are below where they were in 2011.

dealtn wrote:

stockton wrote:As to which stocks to buy, my recollection is that supermarkets and property have proven to be effective inflation hedges in the past.

Do you have any evidence for that?

For instance RPI has risen 31% in the last 10 years. Tesco shares are below where they were in 2011.

I think in the case of Tesco, their over-reaching combined with the rise of discounters affected the business and share price.

While I would expect Tesco shares and the dividend to hold up better than average during a crash/recession, the share price would probably decline.

In general, on average, companies with a Beta value below 1 tend to be less economically sensitive and less sensitive to moves in the FTSE.
Tesco Beta is 0.6.
I would expect Tesco to only move 0.6x as much as the FTSE 100 average. So if FTSE declines 20%, Tesco might decline 12%.
It's not a hard rule - just a vague guideline - but over a diverse portfolio of shares it would probably average out.

My main high-yield holdings (each about 5-6% of portfolio, give or take 1%) and their Beta:
AstraZeneca: 0.4
Glaxo: 0.6
National Grid: 0.4
SSE: 0.8
Sainsbury's: 0.5
Imperial Brands: 1.0
Tesco: 0.5

Average: 0.6

I quickly bodged together a mechanically built high-yield portfolio on an other topic a few days ago, here are their Beta values:
Aviva: 1.2
BAE Systems: 0.8
BP: 1.6
Glaxo: 0.6
Sainsbury's: 0.5
Johnson Matthey: 1.1
Land Securities: 1.3
SSE: 0.8
Unilever: 0.4
United Utilities: 0.5
Vodafone: 0.9

Average: 0.9

This morning, as I type this around 11.45am, my own high-yield portfolio* is down 1.0% (Beta 0.6).
The bodged HYP I created the other day is down 1.4% (Beta 0.9).
FTSE 100 is down 2.6% (Beta 1.0)


*
Those are not my only investments, they are just the main constituents of the income part of my portfolio.

stockton wrote:As to which stocks to buy, my recollection is that supermarkets and property have proven to be effective inflation hedges in the past. As far as supermarkets are concerned we have been left with little choice, but I was wondering about Walgreens Boots (WBA). Has anyone got an insight into how they function in the US ?

If you like supermarkets (UK) and property, you might like to take a look at Supermarket Income REIT (SUPR), which combines the two as it holds property leased to supermarkets.

Yield: 4.83%, but currently at a premium of c 14%.

https://www.hl.co.uk/shares/shares-sear ... rd-gbp0.01

richfool wrote:

stockton wrote:As to which stocks to buy, my recollection is that supermarkets and property have proven to be effective inflation hedges in the past. As far as supermarkets are concerned we have been left with little choice, but I was wondering about Walgreens Boots (WBA). Has anyone got an insight into how they function in the US ?

If you like supermarkets (UK) and property, you might like to take a look at Supermarket Income REIT (SUPR), which combines the two as it holds property leased to supermarkets.

Yield: 4.83%, but currently at a premium of c 14%.

https://www.hl.co.uk/shares/shares-sear ... rd-gbp0.01

In today's sea of red, one is reminded that there are more things to worry about than inflation! Focus on one aspect at your peril.

Out of my 34 holdings, 6 are in the black - including both my REITs - SGRO and PHP.

Maybe SUPR is worth another look.

dealtn wrote:

stockton wrote:As to which stocks to buy, my recollection is that supermarkets and property have proven to be effective inflation hedges in the past.

Do you have any evidence for that?

For instance RPI has risen 31% in the last 10 years. Tesco shares are below where they were in 2011.

It is a generalisation over 70 years, with particular reference to periods of high inflation. All sorts of things can derail a hedge and in Tescos case it seems to have been Tescos management.
Supermarkets clearly ought to be a good inflation hedge in that they are resilient businesses financed by capital from their suppliers, and the value of that capital (ie debt) declines significantly during periods of high inflation.

stockton wrote:It is a generalisation over 70 years, with particular reference to periods of high inflation. All sorts of things can derail a hedge and in Tescos case it seems to have been Tescos management.
Supermarkets clearly ought to be a good inflation hedge in that they are resilient businesses financed by capital from their suppliers, and the value of that capital (ie debt) declines significantly during periods of high inflation.

The most significant period was the 1970s. The answer back then was precious metals and their miners:

https://www.bullionvault.com/gold-news/ ... -031020142


In addition to the low-Beta income shares mentioned a few posts above (~40% of portfolio) I have large holdings in precious metals and their miners (~30% of portfolio). Also ~10% cash and I'm not currently reinvesting dividends so that cash pile will rise.

dealtn wrote:

stockton wrote:As to which stocks to buy, my recollection is that supermarkets and property have proven to be effective inflation hedges in the past.

Do you have any evidence for that?

For instance RPI has risen 31% in the last 10 years. Tesco shares are below where they were in 2011.

So you believe the 1.9% average inflation over the past ten years represents a high water mark in UK inflation, no one need consider the investment case for inflation higher than this??

There were long periods in the fairly recent past with average inflation above 5% or even 10% annually. When people put "high inflation" in their topic headings, that is the sort of "high" inflation they are thinking of, not sub-2%. If you weren't being disingenuous or creating a straw man you'd ask Stockton and others about those periods, not the last ten or twenty years.

GS

GoSeigen wrote:

dealtn wrote:

stockton wrote:As to which stocks to buy, my recollection is that supermarkets and property have proven to be effective inflation hedges in the past.

Do you have any evidence for that?

For instance RPI has risen 31% in the last 10 years. Tesco shares are below where they were in 2011.

So you believe the 1.9% average inflation over the past ten years represents a high water mark in UK inflation, no one need consider the investment case for inflation higher than this??

There were long periods in the fairly recent past with average inflation above 5% or even 10% annually. When people put "high inflation" in their topic headings, that is the sort of "high" inflation they are thinking of, not sub-2%. If you weren't being disingenuous or creating a straw man you'd ask Stockton and others about those periods, not the last ten or twenty years.

GS

Yes, I remember for a year or two our mortgage rate was around 10% and, from memory, more recently I was able to invest in a pretty safe bond paying 10% pa.

And for a period house prices rose at a similar rate and for a house owner with a salary rising similarly, mortgages rapidly seemed smaller.

regards

Howard

PS Inflation can be very localised. Living an hour from London in the country, locals selling their (well maintained) houses are getting prices at least 30% more than last year. Maybe it's temporary? But, of course, it's irrelevant to those of us not wishing to move.

GoSeigen wrote:

dealtn wrote:

stockton wrote:As to which stocks to buy, my recollection is that supermarkets and property have proven to be effective inflation hedges in the past.

Do you have any evidence for that?

For instance RPI has risen 31% in the last 10 years. Tesco shares are below where they were in 2011.

So you believe the 1.9% average inflation over the past ten years represents a high water mark in UK inflation, no one need consider the investment case for inflation higher than this??

There were long periods in the fairly recent past with average inflation above 5% or even 10% annually. When people put "high inflation" in their topic headings, that is the sort of "high" inflation they are thinking of, not sub-2%. If you weren't being disingenuous or creating a straw man you'd ask Stockton and others about those periods, not the last ten or twenty years.

GS

No I don't see that as a high water mark, that's ridiculous. Any quote of mine you can find that suggests 31% over the last 10 years counts as such. I was merely enquiring how provable a claim of supermarkets as an effective inflation hedge is, as its not intuitively obvious to me why that would be the case, and recent history suggest otherwise.

So maybe leave the sarcastic references to strawmen aside, as threads develop and aren't supposed to only refer to the OP's post and the Thread Title chosen.

Perhaps you can inform me how well supermarkets such as Safeway, Sainsbury and Fine Fare did as investments in those high inflation 70s then.

dealtn wrote:

GoSeigen wrote:

dealtn wrote:
Do you have any evidence for that?

For instance RPI has risen 31% in the last 10 years. Tesco shares are below where they were in 2011.

So you believe the 1.9% average inflation over the past ten years represents a high water mark in UK inflation, no one need consider the investment case for inflation higher than this??

There were long periods in the fairly recent past with average inflation above 5% or even 10% annually. When people put "high inflation" in their topic headings, that is the sort of "high" inflation they are thinking of, not sub-2%. If you weren't being disingenuous or creating a straw man you'd ask Stockton and others about those periods, not the last ten or twenty years.

GS

No I don't see that as a high water mark, that's ridiculous. Any quote of mine you can find that suggests 31% over the last 10 years counts as such. I was merely enquiring how provable a claim of supermarkets as an effective inflation hedge is, as its not intuitively obvious to me why that would be the case, and recent history suggest otherwise.

So maybe leave the sarcastic references to strawmen aside, as threads develop and aren't supposed to only refer to the OP's post and the Thread Title chosen.

Perhaps you can inform me how well supermarkets such as Safeway, Sainsbury and Fine Fare did as investments in those high inflation 70s then.

As a long term investor in Tesco I seem to remember that the shares were around a ten bagger from the 1980s to 2007. With their generous dividends added in, they were a superb investment. It all went wrong for other reasons than inflation from about 2007.

So maybe they were a good inflation hedge?

Yahoo's chart below only starts in 1988. From memory the company did well in the 1970s but I can't remember how the share price performed.

regards

Howard


https://uk.finance.yahoo.com/quote/TSCO ... oxfX1dfQ--

Howard wrote:Yes, I remember for a year or two our mortgage rate was around 10% and, from memory, more recently I was able to invest in a pretty safe bond paying 10% pa.

I see that in 1986 my mother-in-law bought some Treasury 1996 15.25% stock at £138 so yielding 11%.

TJH

Howard wrote:As a long term investor in Tesco I seem to remember that the shares were around a ten bagger from the 1980s to 2007. With their generous dividends added in, they were a superb investment. It all went wrong for other reasons than inflation from about 2007.

So maybe they were a good inflation hedge?

Yahoo's chart below only starts in 1988. From memory the company did well in the 1970s but I can't remember how the share price performed.

regards

Howard


https://uk.finance.yahoo.com/quote/TSCO ... oxfX1dfQ--

Interesting you should say this.

As a child I remember overhearing my mum and dad and my great uncle Jack discussing shares, and me asking what a share was. Uncle Jack explained what they are in terms I could understand then went on to explain he owned Tesco shares as in good times, people spoiled themselves buying good food and in bad times, well they still had to eat. So Tesco shares were likely to do well whatever the financial climate.

I can't have been older than 10 and this can't have been later than 1965, as that is the year he died.

tjh290633 wrote:

Howard wrote:I see that in 1986 my mother-in-law bought some Treasury 1996 15.25% stock at £138 so yielding 11%.

Issued at par in 1976 presumably when Dennis Healey went to the IMF. At that level of coupon, you've already allocated next year's taxation income before any other spending plans.

dealtn wrote:

stockton wrote:As to which stocks to buy, my recollection is that supermarkets and property have proven to be effective inflation hedges in the past.

Do you have any evidence for that?

Rather surprised to discover that I cannot find any data.
Should anyone know where to look the appropriate time period wold seem to be 1960 to 1985.

From my own database I'm seeing ...

(Stock price only, house prices excluding imputed rent)

Property is best bet to hedge inflation.

We're not building enough houses, demand far outweighs supply, population growth via net migration, and backlog of demand for affordable housing.

All means house prices will rise in 2022. After good year for stocks think stocks may flatten next year. My predictions often wrong. I'm tempted to go out of stocks and into a second home. It's the additional stamp duty which is stopping me.

This is an important topic of discussion for every investor, and one that I am very wary about trying to account for in my own investments, as I don't believe that the Fed and other central banks have any idea of how perilously close they are creating a destructive inflationary spiral with their unprecedented montary policies.

Personally, here is what I am doing;

- Greatly limiting my exposure to high P/E markets (ie US), where there are so many overpriced stocks. I think across the various strategies I run, I have about 10% of my total invested portfolio in US equities
- Focussing more on value plays, especially UK bluechip dividend paying/value stocks
- Cutting my fixed-income allocation right down
- Holding more real assets (REITs, infrastructure, precious metals, and a sliver of broad commodities)
- Holding a huge interest only mortgage and investing my money instead of paying it off, letting inflation reduce the value of the debt over time

I do think that bondholders are going to see their real purchasing power cut in half over the next decade. That's a steep price to pay for portfolio protection. I also think that due to bond higher convexity at these low interest rates you don't need to hold as many bonds to have the same panic dampening effect as you used to in the traditional 60/40.

Adamski wrote:Property is best bet to hedge inflation.

We're not building enough houses, demand far outweighs supply, population growth via net migration, and backlog of demand for affordable housing.

All means house prices will rise in 2022. After good year for stocks think stocks may flatten next year. My predictions often wrong. I'm tempted to go out of stocks and into a second home. It's the additional stamp duty which is stopping me.

On that basis a better alternative might be builders shares. They make extremely good profits earned in real cash, unlike many UK companies with their creative accounting, and pay decent dividends. Buying a single property involves a lot of on costs (stamp duty, fees etc etc), hassle (tenants) and is extremely inflexible (one property in one location, can't sell a bit of it - all or nothing) etc etc.

I am well-endowed with (invested in ) REIT's, and have some energy, infrastructure and value holdings (IT's). I am however always wary of builders and construction companies as they are very cyclical.

scrumpyjack wrote:

Adamski wrote:Property is best bet to hedge inflation.

We're not building enough houses, demand far outweighs supply, population growth via net migration, and backlog of demand for affordable housing.

All means house prices will rise in 2022. After good year for stocks think stocks may flatten next year. My predictions often wrong. I'm tempted to go out of stocks and into a second home. It's the additional stamp duty which is stopping me.

On that basis a better alternative might be builders shares. They make extremely good profits earned in real cash, unlike many UK companies with their creative accounting, and pay decent dividends. Buying a single property involves a lot of on costs (stamp duty, fees etc etc), hassle (tenants) and is extremely inflexible (one property in one location, can't sell a bit of it - all or nothing) etc etc.

Personally I think that's a very dangerous assumption. Property does OK in mildy inflationary scenario, but like paper assets it prefers a disinflationary environment and if inflation really gets out of control then the central banks will be forced to raise interest rates to strongly positive real rates to tackle the problem head on, which can crash property markets.

There is a really good paper by Schroders which they put out a couple of years ago that details how each asset class tends to fair in inflationary times. It's nuanced, because as well as the absolute rate of inflation, it depends if inflation is still rising or is subsiding, but here is my interpretation of the pecking order

Commodities
TIPs (maybe - not much history)
Gold (distinct from general commodities, because it behaves so differently to most other commodities)
Real estate
Equities
Fixed Income
Cash

as a new user I'm not allowed to post links but if you google "investment-perspective-what-are-the-inflation-beating-asset-classes" you should find the PDF