Investment Insight | The inflation gap
While the pandemic is killing scores of businesses that depend on office workers, it is also making way for start-ups and titans alike to conquer a new industry of powering our remote lives. In our Investment Insight, 25 September 2020 | Digitising the global economy, we wrote that new technology and changing consumer expectations are shattering the status quo.
Our consumer choices are also influencing the data used to assess the economy. There has been a lot of discussion recently that the risk of inflation is misplaced. This concern is not without validity, with delays in New Zealand opening its borders and the United States showing signs of fatigue without more stimulus from the government.
However, the gap between everyday experience and the printed inflation rate is massive. Essentially, the price of the stuff we are buying is rising fast, while the stuff we are no longer buying has been falling, but still counts in how inflation is calculated.
According to an article published by the Wall Street Journal, the price of items in the United States that are no longer required due to COVID-19 are suffering. A new suit or dress is down 17%, makeup is down 3%, hotel rooms are down 13% and air tickets are down 23%. Whereas sitting at home in pyjamas (men’s nightwear is up 4%), cycling (bikes up 6%), reading for pleasure (books up 4%, newspapers up 5%) and making things (sewing machines and fabric up 9%) are adding to our cost of living.
A 7% jump in the prices of used cars and trucks in the United States was the biggest gain since 1969 and followed a 5% advance in August. The strong price increases likely reflect a shortage of used cars amid an aversion to public transport because of fears of contracting COVID-19. Meanwhile, the price of puppies has more than doubled in the United Kingdom during the lockdown.
New Zealand is no different. While the printed inflation rate is 1.5%, there are sectors within the economy which are significantly outstripping this headline number. Fruit and vegetables are up 6%, telecommunications equipment is up 12% and domestic air travel – while suffering from decreased demand – is substantially up 19%. Meanwhile footwear is down 9%, petrol is down 13% and accommodation is down 6%, all suffering from lower demand.
What does this mean for shares?
It is little wonder there is disparity in the fortunes of different shares listed on share markets. Those companies that have seen demand for their goods or services increase and which can raise prices and margins, even during a pandemic, have record high share prices. Many of these are technology companies which have been the key driver for the share market recovery both in New Zealand and abroad.
At the same time, the performance of shares which have seen a large drop in demand in their goods or services have struggled to exhibit the same ‘V-shape’ recovery, and this is reflected in those sectors’ contribution, or lack thereof, to printed inflation. While these sectors disappoint on one level, they show potential once economies open and a vaccine becomes available – the reflation trade.
Structural vs temporary effects
While going to a concert or to the rugby is happening once more in New Zealand, the rest of the world are some way off having the same privileges. The sell-out crowd at the latest Bledisloe cup match in Wellington highlights how fast the fortunes of some industries can change.
Live Nation is a share held by Emerson Point Capital, one of NZ Funds’ external investment managers which forms part of our clients’ growth exposure.
Live Nation has effectively cornered the ticketing and promotion market for live music shows and sport events. Live Nation looks particularly attractive in the coming years because of its roll-out of ‘digital ticketing’ on its Ticketmaster platform.
Digital tickets will drive further differentiation for Ticketmaster, open new sponsorship revenue streams, and increase Live Nation’s share in the secondary ticketing market. However, the stock was down -36% earlier this year and has not yet seen a strong bounce back as it has been severely impacted by lockdowns.
The near-term uncertainty for the resumption of events and the demand from consumers to attend large group gatherings has not significantly changed Emerson Point’s projections for the next few years of the business. The fact that the two recent Bledisloe Cup matches were almost sellouts highlights the pent-up demand we believe the rest of the world will exhibit for concerts and sports. This means a strong recovery in the earnings of Live Nation is likely, yet shares in the company can be bought for much cheaper than prior to COVID-19.
Portfolio positioning
Headline inflation has been weak but drilling into the detail highlights that not all sectors are created equal. We are invested right now to take advantage of the new way the world is consuming. At the same time, we are conscious any opening up of the economy, brought on by a vaccine or otherwise, could see a strong bounce back in some sectors’ fortunes and lead to a faster than anticipated recovery in inflation. We believe it is prudent to position our client portfolios for this eventuality.
Our consumer choices are also influencing the data used to assess the economy. There has been a lot of discussion recently that the risk of inflation is misplaced. This concern is not without validity, with delays in New Zealand opening its borders and the United States showing signs of fatigue without more stimulus from the government.
However, the gap between everyday experience and the printed inflation rate is massive. Essentially, the price of the stuff we are buying is rising fast, while the stuff we are no longer buying has been falling, but still counts in how inflation is calculated.
According to an article published by the Wall Street Journal, the price of items in the United States that are no longer required due to COVID-19 are suffering. A new suit or dress is down 17%, makeup is down 3%, hotel rooms are down 13% and air tickets are down 23%. Whereas sitting at home in pyjamas (men’s nightwear is up 4%), cycling (bikes up 6%), reading for pleasure (books up 4%, newspapers up 5%) and making things (sewing machines and fabric up 9%) are adding to our cost of living.
A 7% jump in the prices of used cars and trucks in the United States was the biggest gain since 1969 and followed a 5% advance in August. The strong price increases likely reflect a shortage of used cars amid an aversion to public transport because of fears of contracting COVID-19. Meanwhile, the price of puppies has more than doubled in the United Kingdom during the lockdown.
New Zealand is no different. While the printed inflation rate is 1.5%, there are sectors within the economy which are significantly outstripping this headline number. Fruit and vegetables are up 6%, telecommunications equipment is up 12% and domestic air travel – while suffering from decreased demand – is substantially up 19%. Meanwhile footwear is down 9%, petrol is down 13% and accommodation is down 6%, all suffering from lower demand.
What does this mean for shares?
It is little wonder there is disparity in the fortunes of different shares listed on share markets. Those companies that have seen demand for their goods or services increase and which can raise prices and margins, even during a pandemic, have record high share prices. Many of these are technology companies which have been the key driver for the share market recovery both in New Zealand and abroad.
At the same time, the performance of shares which have seen a large drop in demand in their goods or services have struggled to exhibit the same ‘V-shape’ recovery, and this is reflected in those sectors’ contribution, or lack thereof, to printed inflation. While these sectors disappoint on one level, they show potential once economies open and a vaccine becomes available – the reflation trade.
Structural vs temporary effects
While going to a concert or to the rugby is happening once more in New Zealand, the rest of the world are some way off having the same privileges. The sell-out crowd at the latest Bledisloe cup match in Wellington highlights how fast the fortunes of some industries can change.
Live Nation is a share held by Emerson Point Capital, one of NZ Funds’ external investment managers which forms part of our clients’ growth exposure.
Live Nation has effectively cornered the ticketing and promotion market for live music shows and sport events. Live Nation looks particularly attractive in the coming years because of its roll-out of ‘digital ticketing’ on its Ticketmaster platform.
Digital tickets will drive further differentiation for Ticketmaster, open new sponsorship revenue streams, and increase Live Nation’s share in the secondary ticketing market. However, the stock was down -36% earlier this year and has not yet seen a strong bounce back as it has been severely impacted by lockdowns.
The near-term uncertainty for the resumption of events and the demand from consumers to attend large group gatherings has not significantly changed Emerson Point’s projections for the next few years of the business. The fact that the two recent Bledisloe Cup matches were almost sellouts highlights the pent-up demand we believe the rest of the world will exhibit for concerts and sports. This means a strong recovery in the earnings of Live Nation is likely, yet shares in the company can be bought for much cheaper than prior to COVID-19.
Portfolio positioning
Headline inflation has been weak but drilling into the detail highlights that not all sectors are created equal. We are invested right now to take advantage of the new way the world is consuming. At the same time, we are conscious any opening up of the economy, brought on by a vaccine or otherwise, could see a strong bounce back in some sectors’ fortunes and lead to a faster than anticipated recovery in inflation. We believe it is prudent to position our client portfolios for this eventuality.
Source: MSCI, Bloomberg.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
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James Grigor is Chief Investment Officer for New Zealand Funds Management Limited (NZ Funds) and a member of the NZ Funds KiwiSaver Scheme. James' comments are of a general nature, and he is not responsible for any loss that any reader may suffer from following it.
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