The consequences of the most recent inflation spike has been binary; as commodity prices spiral upwards, this benefits businesses in the energy and materials sectors, and penalises manufacturers in the consumer discretionary sector, for example.
As the cost of living squeeze has an ever greater impact on populations worldwide, non-essential spending is weakening considerably, further undermining consumer discretionary businesses.
The frothier end of the technology sector has also suffered a significant de-rating as investors increasingly focus on dependable businesses with reasonable valuations, a reliable growth trajectory and real-time profitability.
As humans we are asymmetrically loss averse – a lost £1 gives more pain than a gained £1 gives pleasure – but in an inflationary environment it is important that investors are not paralysed by risk aversion.
Performance since the 1970s illustrates the equity market’s value as a long-term protector of returns. Investors just need to ensure that they allocate to the factors and sectors that will afford optimum preservation.
Henry Cobbe is head of research at Elston Consulting
