Inflation really weighs on returns

Given the number of headlines pointing to years of inflation, investors are asking how to factor in an inflationary trend? In order to evaluate the current environment, it is necessary to separate nominal rates from real rates using some examples close to home for each. Before you scream and click, here are some interesting stats.

Friday, August 5th 2022, 4:05PM

by Mint Asset Management

By Michael Kenealy, Treasurer of the Mint

Over 25 years before Covid19, hourly earnings increased by 3.2%, while consumer prices decreased by 1.9% on average per year. So, in real terms hourly earnings grew at a compound rate of 1.2% (Dec 1994 – Dec 2019). Although it’s hard to imagine or remember floating mortgage interest rates of 10% and time deposits of 8% for many, it was the deal in 1994. ) on the edge of 1.7% of the year during the long period of mortgage failure and housing prices increased by 6.3% per year on average. So, in real terms, house prices have gained 4.4% in the aggregate.

During the last two pandemic years, wage growth has been around 4% per year but inflation (4.6%) is taking over everything and then some, that is Also, real interest rates fell to 0.6% over 2020 and 2021. We all know how property prices have started to run and if the RBNZ wants to achieve its ‘fair’ house price target, they must go. Due to rising mortgage rates, people are feeling the pinch and calls for the Government to allow talent to move in are falling on deaf ears. Our view is that the factors that have influenced house prices in the future, and that the RBNZ will eventually prove successful in reducing economic growth and lowering the housing costs.

Dedicate and invest for real returns

While it may be a relief to many that deposits have risen from the QE induced <1% level to the current 4% level. The difficulty is that in real terms, savers are losing the purchasing power of their money given the June CPI print of 7.3%. In fact, after tax, the term deposit is a savings of about 2.5%, resulting in a real return of less than 4%. Fingers crossed for more money.

For those looking for the best with capital growth, it should be noted that real estate investment trusts (REITs) pay a weighted average after-tax rate of around 4%. . Compare the average weight after tax of about 3% from deposits to NZ50. Although these yields are lower than inflation, there is still a small amount of potential growth. REITs are buying at large premiums to specific book value given expectations that prices will increase. If REIT managers think their real estate values ​​are right and the market is wrong about how much they will increase prices. Managers can allocate a small amount of assets to ensure profitability, even at a lower cost per book and repurchase price while cutting down on improving the return on equity. shareholder.

More broadly, investing in equity funds with a long-term focus on growth compounds is the best way to generate positive real returns over the medium to long term. At the risk of stating the obvious, these are businesses with a constant return on capital employed. People working in the right markets with good business models, strong management dedicated to doing well in their business, and the ability to raise the price in a complex and management environment Pricing to keep up the good work. These are the types of businesses that can add returns and increase their valuation over time and their share.

Share: Michael Kenealy, CEO at Mint Asset Management Limited. The above article is intended to provide information and is not intended to provide financial advice.
Mint Asset Management is the issuer of Mint Asset Management Funds. Download a copy of the product brochure here.

Mint Asset Management is an independent asset management firm based in Auckland, New Zealand. Mint Asset Management is the issuer of Mint Asset Management Funds. Download a copy of the product disclosure statement here 2020.pdf

Keywords: Mint Financial Management

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Inflation really weighs on returns

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