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Worry inflation? You are not alone. A survey by Aegon this week showed that 64% of people are worried about the “financial impact of rising inflation”.
Companies are also (very) worried about: Latest quarterly report Data from the British Chamber of Commerce shows that 59% of companies expect prices to rise in the next three months; 66% of people say that inflation is a “worry”. Both of these figures hit a record high.
What driver? Approximately 30% of companies said that salary settlement is part of it (we might think this is good inflation!) but 94% of companies blamed raw materials (bad inflation).
This is largely related to energy prices: wholesale natural gas prices are soaring everywhere-in the UK, this is five times what it was a year ago, which will hurt the cash flow of every household.
The Bank of America estimates that the average European household’s expenditure on electricity and natural gas in 2020 is about 1,200 Euros. Based on current wholesale prices, this figure will rise to 1,850 Euros by the end of 2022, an increase of 55%.
Next year is unlikely to be much better. Energy prices will continue to rise. why?Because too many governments shine in renewable energy-think we can Phase out fossil fuels Supporting very unreliable renewable energy is much faster than we can actually do-if we can.
This is a decarbonization shock—a fund manager told me that it might even end up causing as much pain as the OPEC-driven oil shock in the 1970s. This may make you angry with the green activists who forced the divestment of fossil fuels for a decade prematurely, and arguing about the painful green taxation of the energy bill.
For example, the European Union’s view that natural gas and nuclear energy must be part of the transition is better than nothing. But, at least for now, prices will continue to rise. Analysts at JPMorgan Chase said that this is a simple question of supply and demand-as always. ..
Investment in oil and gas production collapsed-capital expenditures for new projects fell by 75% from the peak. But at the same time, the overall global demand for thermal energy has “almost no decline”-while the demand for oil is rising.
JPMorgan Chase predicts that global oil demand will increase by 3.5 million barrels per day in 2022, which will be slightly higher than the level of 2019 at the end of the year and hit a record high. New highs will be set in 2023-there are many record highs in today’s column-and I am worried about more unwanted inflation. JPMorgan Chase’s various research teams predict that oil prices in 2022 will be between US$80 and US$125 per barrel. The world’s energy transition efforts are obviously well-intentioned. However, good intentions often pay unexpectedly high prices. This is no exception.
However, although it is easy to hang up gas bill And gasoline prices — British politicians almost forgot about Covid because they are eager to argue about them — rising energy prices may have a greater impact on your long-term wealth than short-term cash flows.
why? Because energy, and the conversion of energy into goods and services, is the basis of most economic activities. This determines how much it costs, and how we effectively convert it into an absolute key variable in stock market valuation.
According to Charles Gave of Gavekal, there are so many that you can use the relationship between oil prices and the S&P 500 to predict bull and bear markets. According to Gave, “all structural bear markets in the United States began when the S&P 500 index was severely overvalued relative to the energy index.”
This was the case in 1912, 1929, 1968 and 2000. The valuations over the years have reflected that investors underestimated the future energy costs and thus overestimated the future profitability of listed companies.
Those who are not nervous enough may also notice that all these bear markets, except the 1929-34 bear market, occurred when inflation rose and “as long as inflation persists.”
If you think of it as rising energy prices pushing up costs, then the company cannot add value or increase efficiency fast enough to absorb costs without raising prices or suffering a severe decline in profits, then it makes sense.
The first will cause inflation and lead to lower demand-which will hit profits anyway-so either way, the low energy cost valuation stocks included in the model begin to look seriously overvalued.
One thing to add here. In the past few decades, one of the deflationary drivers in the West has been cheap goods from China. Part of the reason these commodities are cheap is that they are made with cheap labor—now more and more expensive—and because they are made with the cheapest thermal fuel—coal.
This is also something that is changing. China is keen to reduce pollution and even decarbonize, and its goal is to reduce the proportion of coal in its energy structure to 20% by 2026. Considering domestic political and economic pressures, this is of course far from certain, but you can see which way things are happening.
The key point here is that energy prices are more important than you think. When energy is abundant and cheap, the bull market begins (Gave said, 1922, 1949, 1982, 2010). The bear market started when it didn’t. Times like this.
The investment impact is obvious. Energy stocks performed very well last year. They might do the same this year. But their strength is likely to be reflected in serious weaknesses elsewhere.
You should hedge the former with the latter. The easiest way to access oil and gas in the UK is to use exchange-traded funds, such as iShares S&P Commodity Producers Oil and Gas ETF. Otherwise, there is the TB Guinness Global Energy Fund, which is all related to old energy, or if you want to hedge energy bets, check out BlackRock Energy and Resources Income Trust Fund, of which approximately 33% is invested in old energy, or diversified Temple Bar Investment Trust holds 15% (I hold).
Merryn Somerset Webb is the editor-in-chief of MoneyWeek. The opinions expressed are personal; [email protected]; Twitter: @MerrynSW
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