AQR looked at inflation and returns over the past half-century. Different types of investments have had different sensitivities to inflation.
Looking at the 2022 returns they found the best performance (and thus suitable for diversification) were commodities and several types of trend following.
DB2
The current oil and gas shock may be ending. The Strait has traffic going through, including 10 mbpd and LNG. The Iranians are losing their grip on the Strait.
Sure.
Traffic through the [u]Strait of Hormuz[/u] is currently averaging around 8 to 12 commercial and tanker transits per day—significantly below the pre-war normal average of roughly 60 to 125 ships daily.This is according to (https://hormuzstraitmonitor.com/),
I got hooked by a propaganda piece on Yahoo. Notice I have never criticized the press before- sarcasm.
This little site is interesting.
It is always best to quote and publish the best sources. Sarcasm.
US Energy Secretary Chris Wright said on Sept. 13 that markets will need to continue relying on transit that he estimates at 10 million barrels a day of crude and oil products through the Strait of Hormuz. He called oil markets “tighter than we’d like today, but they’re not overly tight.”
Didn’t read the article, just looked the graph. Didn’t see a category of dividend growers. I try to pick stocks with dividend growth rates above the rate of inflation. Historically 2-2.5% so I aim for 3-4% minimum. Not 100% perfect but has served me well.
There is another graph (#4) that includes more categories. There isn’t one for dividend growers, but classes such as utilities, financials, US low risk and real estate are not great diversifiers against inflation.
DB2
I think I saw a piece somewhere that claimed that utilities and utility company funds are a very good diversifier for inflation. I can’t find the piece anymore. It may also have been something I listened to on a podcast while on the elliptical at the gym. I listen mostly to Odd Lots and Fast Money while on the elliptical.
It is certainly not a low risk strategy. However, I view the best hedge against inflation is to own shares in best in class businesses with demonstrated moats and better margins than their competitors. A very simplified starting point is to use David Gardner’s “Snap Test”. If one snapped their fingers and the business was gone, would it matter? Better Margins and moats then provide some potential pricing power in inflationary periods.
If one confines themselves to owning great businesses, it improves the odds of finding a few absolutely exceptional ones. The challenge is these businesses rarely go on sale and often require the buyer to pay a premium.
Utilities are a good inflation hedge because they are tightly regulated in a manner such that they are almost guaranteed to make a profit. They have great pricing power because you can’t switch if they raise their rates.
The downside is they are also regulated so they don’t make too much profit.
The upside, as you point out, is that they are practically forever. It’s vanishingly unlikely that they are going to get knocked out like a Polaroid, Chicago Tribune, Schlitz Beer, or Sears. If you want some surety in your old age, utilities with a dependable dividend are a pretty good hedge against, well, most everything.
Which hinders them during inflation from passing on the increased costs, thus shrinking their profit margins and making it difficult to raise dividends.
Utility stocks display a somewhat disappointing success rate of only 54%. As natural monopolies, they should be able to pass on cost increases to consumers to maintain profit margins. However, in practice, regulation often prevents them from fully doing so.
What’s more, given the stable nature of their business and dividend payments, utility stocks are often traded as “bond proxies,” meaning they might be bid down relative to other sectors when inflation takes off (and bond prices fall).
DB2
I would not bet on inflation. Appreciation of the dollar is the bet.
Small unleveraged highly profitable software companies in key niches are the very best bet.
Me Me Me! Over here!
