Beating inflation in 2022 Inflation came back with a vengeance in 2021. Markets fear inflation because central banks can destroy Investors were prepared for the Consumer Price Index to rise investment returns by raising rates to high levels, which may in March-May 2021. What they didn’t expect was the onslaught trigger an economic slump. This time around though, the US of bottlenecks and supply chain issues, as well as product and Federal Reserve (Fed) will be patient with nascent inflation, staff shortages, which relentlessly drove up prices. at least for the next few years. Let’s take them at their word, rather than trying to second-guess them. It started with economic reopening after the COVID-19 The equity plays we mention should be able to cope with lockdowns. Goods, ships, lorries and drivers were stranded in various inflation scenarios, as long as the Fed does not step the wrong places when countries opened up, causing massive on the brakes abruptly to cause a recession. delays, product shortages and inevitably higher prices. Global equities The cost of services we hadn’t used in a long time (such as Data shows us that well-selected global stocks can offer air fares, car rentals, accommodation, restaurants) surged, better protection against inflation than other major asset some of it due to prices collapsing in the previous year. classes over shorter periods. This is partly because many Bottlenecks did not ease quickly, and markets also began to companies increase their prices during inflationary periods worry about the possibility of soaring rents and wages. to maintain earnings, creating a positive relationship The number that matters most for markets is the US Core between company earnings and inflation, which then rise Personal Consumption Expenditures (PCE) Index. It rose to and fall together. Visit canaccordgenuity.com/equities-and- above 4% recently, but it is likely to fall next year, particularly inflation/ to find out more. between March and June, as the comparison with 2021 becomes more favourable – but probably won’t return to Automation and robotics the previous sub-2% levels. It may therefore be consistently We believe robots can support modernisation, increase above the 2% target used by most central banks. efficiency and help solve the worker shortage in key Are equities the best way to beat inflation? industries. They should also reduce the cost of repatriating As inflation looks set to persist in 2022, investors will manufacturing facilities to Western countries from be exploring different options to generate a return on China. Over the past few years, the shortfall in workers investment greater than inflation – otherwise wealth falls has been particularly apparent in three main industries: in real terms. If you leave your money in the bank, you are food and agriculture, manufacturing and healthcare. highly unlikely to get deposit rates that will cover price Is automation the way forward? Read more in our blog rises and beat inflation. Likewise, if you buy fixed interest at canaccordgenuity.com/investing-in-automation securities, where the coupon and the final repayment levels -and-robotics/. are fixed, you may not get your money back in real terms. Infrastructure Commodities generally manage to eke out a positive return We believe the broad sector of infrastructure and after inflation, but it’s not always easy for investors to buy transportation is worth considering for several reasons. petroleum and industrial metals profitably. Infrastructure builds fixed assets that reduce operating Historically, equities have offered the best opportunity costs and offset higher prices, and investments often have for delivering real returns over the long term versus other explicit inflation protection built in. There is also a global major asset classes, but there are still risks for investors. push towards infrastructure spending by governments, Higher inflation tends to reduce share valuations, which and much of the money is directed into areas that are ultimately a calculation of future earnings at today’s are working towards decarbonisation. Learn more at interest rate (if interest rates go up, share values historically canaccordgenuity.com/investing-in-infrastructure/. go down). You can read an expanded version of this article and find out Here at Canaccord, a key investment theme for 2022 more about our views on inflation and its impact in 2022 at: is aiming to protect discretionary portfolios against canaccordgenuity.com/investing-to-beat-inflation/. inflation, and we will try to achieve this by exploring three different equity-based options: global equities, automation and infrastructure. Investment themes 2022 2