Written by Nick Clay, Head of Global Equity Income at Redwheel
With interest rates increasing, and inflation out of control, we, like most of the market, remain bearish. The volatility we are currently experiencing tends to generate a retreat from the market, as fear of investing mounts – but withdrawing in an inflationary environment will only result in compound losses and a decrease in value of your cash.
The market is right to be mindful that the recession we’re likely to enter is unusual – unemployment is expected to remain relatively low, energy prices elevated, and interest rates are continuing to climb despite the weak economic outlook. As a result, some of the strategies investors might choose to employ, such as investing in value funds and smaller companies, may run against the grain of the orthodox approach of simply battening down the hatches.
One strategy which investors can use to help navigate volatility and diversify risk – in addition to investing regularly – is one which produces a regular dividend. If investing earlier in life and looking for savings growth, then re-investing the regular dividend distribution allows investors to benefit from the compounding of those dividends. This is especially relevant in turbulent times, as it means those dividends keep reinvesting even in a falling market, creating a larger investment commitment when the market eventually turns back up.
We hold several stocks that can pass on price increases and growing nominal profits even in an inflationary environment. This has enabled them to increase dividends to compensate for core inflation. These are not just to be found in our staples and large healthcare companies, but across the portfolio as a whole. We have found exciting stock-picking opportunities in a number of sectors, such as semiconductors and luxury retail – where some valuations are insanely low despite demonstrating a clear ability to flourish in inflationary conditions, confusion in the market has meant that some of these are being treated in the same way as inferior businesses.
Whilst a deep recession is looking increasingly certain, we aren’t there yet – and there is a danger in thinking too far ahead. This happened in August this year, when the market wishfully thought inflation had peaked.
Ultimately, inflation will dictate all. But in our view, those with a long-term and steady approach, and who pick out stocks which can achieve dividend growth, will win in a flat, down or volatile market.”