If Inflation is coming, which assets are the best?
Commodities, Miners, Quality or simply Assets?
I have been thinking about protecting my portfolio from inflation for a very long time and it took a real inflation before the possible answer appears right in front of my eyes.
The first thing everyone look for is the commodity play.
That included things like energy like oil or coal or uranium, precious metal like gold or silver, everyday metal like copper or iron.
Those are hard to analyse and understand…
Do buying future contract works?
Or there are better ways to express your view?
Picking up the skills to analyse the plethora of commodities is confounding too.
Since it would probably take a lifetime to be able to understand the intricacy of each commodity, maybe it is wiser to never start?
Conclusion: The question is what commodity is possible for analysis and what financial instrument could I use to express that theme? If I can answer to the question pose, I would be willing to do the trade.
The miners are even harder than the commodities.
All things sound gibberish unless you have a geological major.
The only way down this road is to believe everything that the management is presenting.
The b.s that the miner management come up with sounds like the b.s that startups tell the VC.
It could be about 10% real or maybe nothing real at all.
The safest way is to stick to the bigger guys? At least, there is a better chance that there is lesser b.s?
Without a special situation, it is hard to differentiate the level of b.s existing within the narrative.
Or maybe the best assets would do better?
Conclusion: The best miners provide the best diversified risk but valuation can be a killer here. The way I am playing it is is to look for the best mines in world which has yet to be develop. Like a junior mine that is on the verge of something big. It is like looking for Vale before Vale is Vale (without the accident).
Maybe the high margin business would do as well in an inflationary environment.
They could navigate the environment better by raising their prices or they could just push a tad harder on sales to compensate the fall in margin.
But the high margin, high quality business seems to be a well recognised theme. There seems to be not much of a place to hide if margin contraction is contain but valuation multiple continues to fall.
Conclusion: There seems to be some companies which is heavily sold off and seems to be having a few more great years ahead. I am not piling in just in case my valuation is off my a mile. But overall, the growth, high margin companies should do decently well into the future.
What if I have an asset which requires
high upfront cost,
minimal ongoing maintenance cost,
produce a reasonable return,
on a possibly leveraged balance sheet during an inflationary period?
Maybe that is a better way to classify useful inflationary assets?
These should be the variables that make such an asset good in inflationary time.
This type of asset should produce a low ROI in the absence of leverage.
Since the assets had already been build, the asset inflation should be able to outpace the higher operating cost?
Coupled with a huge loan, that would just make it out way better than most assets.
Conclusion: This is a type of inflation assets which I have never considered before. The idea is that assets will tend to appreciate in price and the income from the assets will also grow resulting in a re-rating.
Maybe this could just be the way to beat the inflation that is coming or not.
The search and the thinking continues.
Recently, I have a bias towards the oil service companies which are cash rich and selling below replacement cost.
The upturn in oil exploration and the ability to leverage up when times are good is the key to outperformance here.
I am owning a bit of everything as the outcome seems to be very unclear.
If you have any thoughts, do drop me a note below.