Over the past 18 months, markets appear to have been stubbornly climbing an ever-growing “wall of worry”. Chief among the various worries is one from holiday shoppers and travellers alike – price inflation.
The U.S. Travel Association estimates that, this year, travellers will pay almost 5% more for food and drink, nearly 20% more for lodging, and an eye-popping 24% more for transportation than they did last fall.
Indeed, inflationary pressures in travel and tourism have joined price surges in goods and services of all kinds, as supply chain issues intensify the mismatch between consumers’ bulging pockets and retailers’ scarce inventories.
Feeling the port pinch
The ports of Los Angeles and Long Beach (the two largest in the U.S.) are struggling as container ships pile up in their harbors. The number of anchored and loitering ships has ballooned from more than 65 at the end of September to more than 80 today, and the number of ships being processed has bottlenecked as 24-hour crews grapple with the constraints of available space on land.1 Given that nearly 40% of all container traffic entering the U.S. passes through one of these two ports2, it’s no surprise that businesses are feeling the pinch.
However, looking under the hood of inflation (and supply chain issues) can help take the edge off this year’s sticker shock.
Poised for pre-pandemic levels
Supply chain issues appear to already be reaching a peak and rolling over. Although an increase from 65 anchored ships to 80 may sound daunting, it represents a far slower rate of growth than the leap from 25 anchored ships on August 3, to 43 on August 31, and then to 66 by September 28.3
The WCI Container Freight Rate Composite, which tracks the cost of freight across eight major routes to and from the U.S., Europe and Asia, tells a similar story. After peaking over the summer at over $10,000 per 40-foot container, freight rates have reversed course and look poised to begin their eventual return to pre-pandemic levels.
Source: Cornerstone Macro
That said, even if today’s inflationary conditions are pandemic-induced and therefore transitory in nature, investors’ portfolios – and pockets – will still need to withstand them as they prevail well into 2022 and potentially beyond.
So, what can equity investors do to lean into these conditions?
Historically beneficial opportunities
One approach is to look for opportunities in industries that historically benefit from higher yields (driven by inflation) like financials, autos and auto parts, industrial goods and services, materials, and natural resources. Within our client portfolios, stock picks that play into this inflation story are also tempered with a barbell approach that includes high-quality and defensive names.
Meanwhile, on the fixed income side of the investment universe, our strategies are being positioned to Protect and Enhance Purchasing Power (PEPP) by allocating capital to securities whose yield “floats” with prevailing rates, real-return bonds that outperform in inflationary environments, and by underweighting yield-sensitive government debt.
For a more in-depth look into our thinking around inflation and other recent market-related worries, join us for our first interactive digital event, Conquering the Wall of Worry, on Wednesday, November 24. Our Chief Investment Officer, Scott Blair, and head investment portfolio managers will be ready to address your questions live!
1 Marine Exchange of Southern California
3 Marine Exchange of Southern California