Money Week - UK (2021-10-08)

MONEYWEEK 8October2021 moneyweek.com

20 Investmentstrategy

IwishIknewwhatcreditratingswere,

butI’m tooembarrassed toask

Whenafirm,government,or

otherorganisation wants to

borrowmoneybyissuing

bonds, theirbonds will usually

beassignedacredit rating.This

givestheinvestoranideaof how

likely theyaretoget their money

backontimeandinfull.

Theseratingsareissuedby

credit-ratingagenciessuchas

Standard&Poor’s, Moody’s

andFitch. Whendetermining a

rating,the agencywill lookat

severalfactors that may

influencethelikelihoodof the

bondbeingrepaid.These

includethe profitabilityof the

issuer,its past credit recordand

anyassetsthedebtmightbe

securedagainst(if adebtis

securedagainstpropertythat

canbeseizedandsold,thenit’s

likely tobesafer thanadebt

withnocollateral).

Forbondsissuedby

countries, factorsincludethe

strengthsandweaknessesof

theeconomy, thecurrentlevel

ofdebt,thesoundnessoffiscal

andmonetarypoliciesandthe

qualityofinstitutions. Ratings

runfromAAA(orAaa on

Moody’sscale)for ultra-low-

riskbonds–issuedbyasmall

number ofwealthymajor

economies, veryhigh-quality

institutionsandblue-chip

companies–downtoD(orCon

Moody’sscale)forthosethat

havefailedto makeaninterest

orcapitalpaymentontimeand

arethereforealreadyin default.

Bondswithratingsequal

tooraboveBBB-(orBaa3on

Moody’sscale)are referred

toasinvestmentgrade, while

thosewithlowerratingsare

knownassub-investment

grade, speculativegrade,

highyieldorjunkbonds

(dependingonhowpositive

youwanttosound).

Bondsthatarecutfrom

investmentgradetojunkare

knownas“fallenangels”.

Manyfundsareonlyallowed

toholdinvestment-grade

bondsandmaybeforcedto

sell inthesecircumstances.

This caneasily pushthe price

ofnewfallenangelsbelow

whatmightbejustifiedby

their fundamentals.Forthis

reason,thesebondshave

hadhigheraveragelong-

termreturnsthan anyother

gradeofcorporate bonds.

wereakeycomponentofthe 1970 sinflationand

whilethatmayberepeatedthere’snoguarantee.

Goldalsodidwelloverthedecade,butthe

pairarecautiousonitsprospects–duetoitslack

ofcashflows,“wereallydon’thaveawayof

knowingwhetherwearepaying

ahighora lowpriceforany

insuranc epropertiesthatgold

mayoffer”. (Westillli kegol d,but

they’reentitledtot heirview.)

Thegoodnewsisthatoneassetclassdoes

standout–cheapstocks.Eventhoughmarkets

massively derated(ie,theamountthatinvestors

werewillingtopayforagivenlevelofe arnings

collapsed)duringtheperiod,US equitiesstilljust

aboutbeatinflationbetween1967and1980,

whilevaluestocksdidfarbetter.Andofthemall,

commoditystocksdidbest.“Wesuspecttheydid

muchbetterthan theunderlyingcommodities

asastoreofvaluebecausetheywerecheap–

some thingthattodaymaywellbet rueagain.” For

exposuretoo ilandgas,consi dertheiSharesOil

andGas Explora tion andProdu ctionETF (LSE:

SPOG),whileforexposuretom iningstockstry

BlackRock WorldMiningTrust (LSE:BRWM).

Theofficialnarrativeamongtheworl d’scentral
bankersisthatinflationis“transitory ”. Pricesare
risingnow,butthat’sjustbecausewe’rereopening
theeconomyandsupplychainsarere adjusting.
Inthelonge rrun,wedon’tneedtoworry.
Perhaps.Butbeforeyoutaketheofficialviewat
facevalue,it’s worthremem beri ngthatalmostno
oneinth emainstreameconomicestablishment
orinapositio nofm onetaryauthoritysawanyof
thiscomingata ll.Soaringenergycostsandrising
wagesink eypartsoft helabo urmarketmight
washoutoverthecomingmonths.Butify ou’d
ratherbesafethan sorry, howcanyouposition
yourselfincasetheofficiallineisw rong(again)?

Investingtobeatinfla tion
JamesMontierandPhilipPilkin gtonhavelooked
athowtop ositio nportfoliosfor
inflationinanewpaperforUS
assetmanagerGMO.Theynote
thattherearetwoaspectshere–
oneishedgingagainstinflation
inth eshortterm,whichismore applicableto
institutionalinvestorsandtraders.Forlong-term
investors(suchasMoneyWeekre aders),thekeyis
tofindassetsthatoperateasdecentstoresofv alue
–theywon’tnecessarilyreacttoeveryinflation
moveandmightevenstruggleatp ointsint he
cycle,butovertimethey’lldeliverrealreturns.
Theasset classmostpeopleturntofirstis
commodities.YetasMontierandPilkin gton
note,oneofthemainreasonsthatcommodities
areseenasa greatinflationhe dgeisbecauseone
inparticular –oil–didtremen douslywellduring
theinflationofthe1970s(althoughtobef air,
commoditiesing eneral“justaboutactedasa
storeofvalue”).Therisktodayist hatoilshocks

Alook back at the 1970s reveals what

you should invest in if you’re not

convinced inflation is “transitory”

JimChanos,

founder,

Kynikos

Associates

“Thewhole

Chinese

propertymarket

isonstilts,”warns

short-sellerJimChanos

intheFinancialTimes.

Mostattentioniscurrently

directedatEvergrande,one

ofChina’sbiggestproperty

developers,whichhas

recentlymissedabond

paymenttooverseas

investors.But“therearelots

ofEvergrandesouttherein

China...allthedevelopers

looklikethis”,hesays.

Chanosagreeswiththe

majorityofinvestorsthat

Evergrandewillnot

representarepeatofthe

LehmanBrotherscollapsein

2008 ,intermsofdisrupting

theglobalfinancialsystem.

However,forChinaitself“in

manywaysit’sfarworse”.

ThetroubleisthatChina

hasbecomeoverlyrelianton

residentialpropertyasakey

sourceofGDPgrowth.“If

youtrytodeflatethisbubble,

itisfraughtwithrisks.”The

countryneedstofind“new

growthdrivers”oraccept“a

lowerlevelofgrowth.Has

theChinesecommunist

partygrappledwiththe

implicationsofthat?That

remainstobeseen”.

Chanos,thefounderof

hedgefundKynikos

Associates, isprobably best

knownforprofitingfromthe

demiseofenergygroup

Enronin2001. In lightofhis

concerns,notestheFT,

“Kynikoshasdoubledits

exposureto Chinainits

globalshortfundtomore

than10%overthepast year”.

ShortpositionsincludeHSBC

andStandardChartered,

basedontheirexposureto

Chineselending.Chanosis

alsoshortingthecasino

groupWynnResorts,which

hasasignificantpresencein

Macau. TheChinese

authoritieshavebeen

crackingdownonthesector.

“Tobeatinflation

inthelongrun,buy

commoditystocks”

How to beat rising inflation

Guruwatch

Makesureyour portfoli odoesn ’t go out offashion

©G

etty

Imag

es

John Stepek

Execut iveeditor