Equities vs. Inflation

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A Citigroup equity strategist named Robert Buckland was cited in the FT yesterday making a bearish case for equities. Included was this little snippet about inflation and equities;

Equities have never been particularly good at hedging inflation anyway, and now index-linked bonds can do a much better job .

I'm not sure that's right. Over the last ten years this is correct, but 20 years ago the S&P 500 was at 296, so it is up 185% (again that is after cutting in half over the last year) plus dividends, and the US postage stamp which is a good proxy for longer term inflation is up 110% for the same period, and that is much closer than normal.

Be that as it may, it raises an interesting theoretical question. If financial plans rely on growth and equity indexes can't grow, then investment capital must be allocated to substitutes for equity indexes. From a bigger picture, when you buy equities you are buying that which you expect (or hope) will grow. TIPS are a relatively new product that cover the inflation protection part of the dilemma but not the growth part.

For purposes of what is being explored in this post I should note that even if equity indexes continue to flounder there will be individual stocks that do well, but those will be harder to find. If the big names in various sectors won't do it, then it stands to create a huge problem for many people and they need to be very innovative.

Can one avenue of solution come from buying growth on the ground in various countries? Increasing commerce that might come from a turn-up in the economy would seem to create revenue growth for shipping ports, airports and state of the art toll roads.

I looked at a few countries just to get a sense of whether, during the previous bull market, these types of "commerce" stocks generally moved up with the market. In past cycles there has been a correlation between broad stock market indexes turning up and the economy turning up (obvious). In a way the broad indexes have been proxies for economic expansion (also obvious) but the question is whether the broad indexes, which are made up mostly of banks, oils stocks, the phone company and so on, will struggle to go up at a reasonable rate, and if they do struggle, can ports and roads be proxies?

So it worked in Australia with Transurban (TCL.AX), New Zealand had mixed results with Auckland Airport (AIA.NZ) and Port of Tauranga (POT.NZ), it worked in France with Societe Des Autoroutes Paris (ARR.PA), but Aeroports de Paris (ADP.PA) doesn't chart far back enough, and the last one I looked at was China, which had a mixed result in terms of correlation between a couple of toll road stocks and Beijing Capital which is an airport stock.

In terms of practical investment application, well, first there needs to be something to it, and we don't know yet, because almost nothing is going up these days. If I dip a toe into these waters it would be with one stock at first and then maybe a second for a max of 5%.

As this post was just a theoretical exploration there is no answer, maybe just more questions or a push to get you to think about this on your own or explore different things that catch your interest. I think there is something here with these stocks there is still more to learn.

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