How To Profit From Inflation.
How To Profit From Inflation.
Unless you have been living under a rock for the last few weeks, you will have seen that the markets have been spooked by the prospects of higher inflation. This has come about due to the post Covid bounce we predicted back in January, in our Roaring 20s article. https://willowrivers.com/the-roaring-20s-are-back/ This latest article looks at how to profit from inflation.
Just in case you don’t know what inflation is. I have borrowed a definition from Robbert Kiyosakis website: The simple definition of inflation is when prices rise and the purchasing power of a currency drops. It means that you can buy less with your money than you used to be able to. Simple!
So we are all getting poorer. Our money goes less far and this is bad news unless our income is linked to inflation.
Luckily there are ways of beating this. Some assets perform better than others in an inflationary environment and we are lucky enough to have a number of these on our books here at Willow Rivers Wealth Ltd.
Long-term (since 1950) correlation between inflation & various financial/real assets.
So lets first look at what not to do!
The worse thing you can do, is hold all your net worth in cash in an inflationary environment. You are effectively making a negative return. With some analyst stating inflation could pass 5% this is a very real threat.
The boom on the back of the rapid vaccine rollout is starting to take shape and many assets and commodities are getting swept up in the rapid recovery. None more so than in the construction industry:
Inflation in building materials will lead to higher prices for construction and thus higher property prices down the line. Added to this, demand for property is rising as people come out of look down and look to improve their living standards.
Fuel prices are also rising rapidly as we get back on the roads and start to fly again. Expect $100 oil in the not too distant future. https://financialpost.com/commodities/energy/oil-gas/peak-demand-more-like-a-supply-crisis-propelling-oil-to-us100
So how do we beat and profit from inflation?
How to profit from inflation
- Property Investment
So the first and most obvious place to look when trying to beat inflation in the property market. Inflation is also a good time to use leverage. One can buy a property with a buy-to-let mortgage and buy an appreciating asset with a 25% deposit but see capital appreciation on the full value of the property. If you fix in your mortgage rate for several years you should be able to see steady capital appreciation and rental growth, while your fixed interest costs remain the same. A very crude example of this would be a if a 100,000 pound flat appreciates by 10% and you have invested 25,000 you have made a paper profit of 40%. (10,000/25,000 x100) comfortably beating inflation. There are obviously other costs to take into account but even when these are added you should still be well clear of any inflation.
- Property development.
By developing houses and projects now, you can build at the current prices and sell at the new rate of inflation in 6 to 12 months time. We offer a number of property developments around the county all with market beating returns of 15%+. We use a JCT contract https://corporate.jctltd.co.uk/products/about-our-contracts/ which fixes the price of the build at the front end and avoids any uncomfortable surprises for the investor. Get in touch to find out about our latest development opportunities around the county. More details at www.willowrivers.com
- Commodities
You can trade commodities on all the usual platforms such as Etoro and IG. Oil, Copper and Timber are already showing excessive growth, but just about any commodity used in the building process will see substantial growth over the next couple of years.
- Renewable energy with inflation linked returns.
We have been developing renewable energy projects for over ten years now. Feed-in-tariffs linked to inflation are a thing of the past now, however we are still building private projects with a Power Purchase Agreement (PPA). The power generated from wind, solar or geothermal is sold back to the business below and the contract is fixed for 20 to 30 years with an inflation linked kicker to the price. We are able to generate 10% to 15% pa returns which will rise in line with inflation. Get in touch to find out what projects we have available for investors. Projects start from 20,000 pounds to 25m. www.willowrivers.com
- Farmland and Forestry
UK Farmland will also appreciate again. The combination of the security land ownership offers, zero inheritance tax and yields linked to commodity prices will attract both UK and international investors alike. We work closely with a number of UK land companies and can help with forestry and agricultural land investment.
Conclusion
Don’t just take our word for it, hedge fund manager Michael Burry made famous in the the movie Big Short is also investing for inflation. https://moguldom.com/338484/famous-big-short-investor-michael-burry-warns-weimar-like-hyperinflation-is-coming-to-america/
Now is the time to get your house in order and profit from what is likely to be a bumpy road ahead.
If you have any questions about building an inflation proof portfolio, do get in touch and we can discuss some strategies.
Additional resources on inflation:
Institute of International Monetary Research has produced a good video on their inflation expectations over the next couple of years.
Good video here on why we can expect higher inflation of the next couple of years.
https://www.wsj.com/articles/if-inflation-is-coming-here-is-what-to-do-about-it-11620694235