...where are you putting your money that is any better? Equities represent ownership of business that own real assets and that sell goods or services at prices that should (in general) rise with inflation. What are the better alternatives that these investors are reportedly switching to?
This Reuters article reports that investors are switching out of equities because they fear that central banks may be unable to cut interest rates to deal with slowing economies because of the need to keep rates high (or even raise rates) to limit inflation.
This is, of course, perfectly reasonable. What is not clear to me is what alternatives are more attractive in the context of rising inflation. Bonds are just as vulnerable to interest rates, and their value is eroded by inflation in a way the value of shares is not.
There are, of course, index linked gilts and the similar government bonds in other countries. Inflation proof, but low return and never that popular. Commodities are safe from inflation, but are hardly safe investments.
In fact, given that we can expect real interest rates to be stable in the long term, and that recessions will eventually end, then given that equities are usually long term investments anyway, I fail to see what the better alternatives are. If you are pessimistic about the economy, buy defensive shares, but I see no point in switching asset classes except in favour of index linked gilts, or where the short term is important.
Comments
MonevatorExactly right. In the short-term the link between equity performance and inflation is poor, but over long periods equities are one of the best ways to keep pace with inflation (the other being property).
My question to inflation-equity bears would be: If food prices go up say 100%, what do you think is going to happen to the earnings of Tesco (even if there are similar input cost hikes, fuel rises, etc).