Average returns actually achieved by individual investors over time tend to lag stockmarkets themselves. Running to cash or chopping and changing investments in a crisis are undoubtedly factors in this. Emotion gets in the way of patience. This year there is no shortage of challenges; war, inflation and the possibility of recession in 18 months. But securing good investment returns over the longer term needs faith in the ability of economies and businesses to adapt. The world is now much better placed to manage changes to supply chains and build up resilience. Already there is some easing of the oil price and signs that some disinflationary forces are reasserting. And many companies are currently trading well despite all the difficulties.
Geopolitical shocks tend not to dominate investment thinking for long; markets usually recover on an easing of tensions rather than full resolution. It is a mistake to hold off investment for a world free of uncertainty. Governments and central banks have strong incentives to shield consumers from some of the extremes of commodity price moves, and consumers themselves will adapt. Certainly, the US Fed has indicated more aggressive tightening. But this is likely to be adjusted if evidence mounts of the cooling impact of supply disruption and commodity prices. Technology is a powerful force for improving services and productivity and is likely to remain disinflationary even as globalisation rolls back.
The challenge for investors now is in stock selection, identifying the companies best able to deal with inflation. With skill shortages, higher energy costs, and supply chains impacting manufacturers, the winners may be distributors, business services and companies with unique products and services. First to benefit will be those providing services that enhance business resilience or sustainability, or which provide logistics support to shorten supply chains. In the inflation of the 1970s, many capital intensive businesses gained initially from inflation, but were ultimately unable to live with it as it eroded their capital base. Some large cap businesses are burdened by legacy structures and business models that restrict their ability to adapt. They are also much more in the political spotlight; exposed to intervention that restricts ability to adapt and raise prices. Companies best placed in the current environment may be mid cap, flexible and innovative.