Inflation to be higher for much longer – threatening investors

Due to demographic decline, deglobalisation, and decarbonisation, inflation is set to be structurally higher for years to come. This poses a significant threat to the creation of wealth amid declining purchasing power. 

This is feedback from Old Mutual Investment Group (OMIG) portfolio manager Graham Tucker, who unpacked how inflation affects investors at the company’s 2024 release of its Long-Term Perspectives report. 

The publication, an annual study based on 94 years of data, examines the returns from various asset classes and inflation movements to draw insights and lessons for the company’s investment process.

Tucker warned that in an environment of structurally higher inflation, interest rates are likely to be higher than they have been in the past two decades as central banks focus on bringing inflation under control. 

Declining populations in developed markets, deglobalisation, and decarbonisation are three broad, long-term themes that will drive inflation higher. 

“In a higher-inflation world, your wealth is being eroded faster every year,” Tucker explained. 

The OMIG publication contains some stark illustrations of the erosive impact of inflation on a ‘cash under the mattress’ savings strategy over 30 years. 

At the South African Reserve Bank’s lower inflation target of just 3%, an amount of R10,000 at the start of 2024 will buy R4,000 worth of goods in 2054. 

At the 6% higher inflation target level, one would be able to purchase less than R2,000 worth of goods 30 years from today.

Many South African assets are attractively priced and positioned to deliver fantastic returns as the country chips away at its structural growth constraints. But the warning to investors is clear. 

“Without much-needed progress on growth-enhancing reforms, the returns these South African asset classes will deliver will most likely disappoint compared to the returns implied by their current valuations,” Tucker said.

Equities have delivered strong inflation-beating returns, but investing in the right equities has been crucial, with global equities outperforming South African equities by a significant margin. 

“The variation in returns from different asset classes and regions creates an opportunity to add value through active asset allocation decisions.”

One of the best defences in terms of managing the shorter-term risk in the form of volatility is diversification.

Investors who remain invested through periods of uncertainty typically weather the storm of market downturns better than those who disinvest for fear of suffering short-term losses.

Time in the market, rather than timing the market, is a vital principle for investors to follow to ensure they build wealth over time, Tucker said.