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Investing in a time of inflation
This is something that we're all going to have to learn all over again - how do we invest in a time of inflation? The last people who had to do this - in Europe or the US at least - with any vigour were operating back in the 1970s. Adults then will be retired now. But the rules do change quite markedly from what we've been used to this past decade and perhaps longer than that.
For example, projects that take a long time to come to fruition become very expensive to finance. Not particularly because of inflation itself but because of the higher nominal interest rates that usually accompany it. Long shot unicorns that might take 5 years to come out of stealth mode are the sorts of things that don't benefit from this sort of change in financing modes.
So, it's worth thinking about the things that do - or might do.
BT and Mukesh Ambani
There was a report earlier in the week that Mukesh Ambani - of Reliance Industries - was going to bid for BT. That's the old British Telecom and the heart of the business is what is essentially a monopoly of the fibreoptic backbone in Britain. There's a vast and underfunded pension fund as well.
Well, OK, the claim appeared in one Indian newspaper, was swiftly denied and yet the share price moved 10% on the back of it.
The denial means that Ambani simply cannot bid for 6 months. That's part of the London rules, absolutely deny you're going to bid and you can't for that period of time. There's also a French billionaire on board with 12% or so of the stock. He's also banned from bidding until - until Dec 7th actually.
But my point isn't about whether these specific folks are going to bid for this specific company. Rather, why would they if they did? What's the attraction?
For there's definitely an attraction there. The general market assumption is that BT is in play currently. Well, if it's in play why is it? There's nothing very exciting about the business, there's that pension fund problem, so, why?
It's a regular and boring utility more than anything else. Even with oversight if not direct regulation of the prices it can charge customers. So, who would want this?
Inflation and interest rates
OK, so now think of it like a financier. Not as a business that you're going to grow. Or something lovely like a new tech, or a new market. Think just about money and financing.
Now add in what we all think is going to happen. Or at least, many of us think is highly likely to happen - inflation and higher nominal interest rates. Even, possibly positive real interest rates as well.
Come on, we all do know that the QE forcing down of interest rates is going to end soon enough. And there's a lot more thought now - much more than there was even a few weeks back - that the inflation is going to be a bit more than merely transitory.
OK, so, as a financier what would you want?
Well, in a perfect world you'd want a business where - even if, perhaps especially if, regulated - the prices you could charge to consumers were reliably going to rise with whatever inflation there is. For while your costs might rise so too will your revenues and you'll be OK. That would be merely a defensive stock of course.
The other side of this, real interest rates for corporates are negative these days, quite strongly so in many cases. It's also not difficult to borrow for a decent tenor these days. 10- and 20-year bond issues are easy enough.
What's the effect of inflation on borrowings? It diminishes the real value of what is owed of course.
Ah, so what does that mean?
Well, if you've a nice utility like the broadband backbone - or perhaps the electricity grid, or a water company, you get the idea - where pricing is between highly likely and fixed by legislation as keeping up with inflation plus you can also finance that at fixed rate and watch that debt burden deflate, well, you've got a bargain, haven't you?
Which is why there is this interest in the utilities. It's true that we can't go out and buy the whole of one of these, not even if we act in concert we can't. But this is also why utilities are regarded as very decent stocks in a market of rising interest rates and of possible inflation. The dynamics of pricing and financing the business work in their favour.
My view
I'm not recommending BT nor insisting that it really is in play. Rather using that rumour as a hook upon which to hang the point. Inflation and rising interest rates - things we've not really seen for decades - make decision making very different. While we're not billionaires buying whole companies there's a value to doing what our forefathers (even I'm not old enough to have been in the market in the 1970s) did the last time around.
The investor view
This is, as I say, only an example. But the finances of companies become important in what I think are likely to be conditions coming up. Inflation and rising interest rates. We want people financing at fixed rates operations which produce inflation protected revenues. Utilities is just one such sector. Which is why the rumours of buyouts happening.
