Pensions investment update March 2025

Trevor, there were three things I wanted to cover for your listeners today.

Firstly, I know you talked about spike-flation very much early on in the year, so I wanted to get your perspective there and how it relates to the current investment environment.

Ever since I've known you, you've talked about the benefits of diversification, so we can drill into that.

And then finally, I know you don't have a crystal ball, but what is your perspective in the short to medium term for our investors.

So why don't we start with one of your favorite topics, spike inflation.

Right, so what do we mean by that? It's a word I kind of made up, so sorry about that.

It's a combination of inflation and spike and we all know what that means because of the big increase in the cost of living we saw after the pandemic and the sort of inflation rates we've seen are very similar to those in times like the 1970s or actually around the two world wars when inflation often surged.

And if you look back to those periods, inflation surged.

Then it came back down to quite low levels.

That's kind of what we're seeing at the moment.

So people are saying inflation's a bit more normal at the moment, but the price level is still higher.

The cost of living is still higher.

And what we've seen in the past is the times when you get these shocks to inflation, you often get more than one shock.

So there could be further things out there which cause inflation to rise again.

And you only have to look at the White House at the moment and Donald Trump talking about tariffs.

So that's a kind of tax on imports and exports, which would raise prices.

If you look at geopolitics, the wars around the world, concerns around Russia and Ukraine, but also in the Middle East, that could push oil prices higher.

And then you've got the move to net zero.

So as people are moving to newer technologies, not using fossil fuels, you've generally got a decrease in investment in fossil fuel capacity, which means that when you do get disruption to supplies or is a surprise in demand, prices can move.

So we think that's all vulnerable to inflation picking up.

And that just creates a much more choppy environment for investors, because when inflation goes up, as you know, interest rates go up, and that can create a shorter business cycle.

So it's a time to think about the other two questions you asked really, one is the way you can spread your investments or diversify them to include things that can protect you a little bit against inflation, and then how you can be fleet of foot in this faster-moving world. Yeah, that's great.

And you've often talked, you know, going back to what you just said about diversification, you've talked about the different asset classes and how they offer that level of diversification, particularly around, you read something very interesting recently about UK markets and what they do in terms of the spike inflation environment.

Could you go into that a little bit more, please, Trevor?

Yeah, so what we think about the assets we include in portfolios, we've got global company shares, so global equities, we've got government bonds and company issued bonds, we've got commercial property, we've got commodities, and those are the main four asset classes.

And not all funds out there include all of those asset classes. So I'll come back to the UK shares point in just a minute.

But for example, Royal London is the UK's largest investor in commodities.

Having some commodity exposure, it's usually quite a small percentage, but having some commodity exposure in a fund means that when you get one of these inflation spikes, even though that can be bad news for stock and bond markets, you're making some money somewhere from the commodities going up in price.

So if you like, you've got a bit of a way of benefiting from a cost of living increase rather than getting hurt by it.

Commercial property, again, over the long run, tends to beat inflation because the rents tend to go up with inflation.

And it's the rents that you value property off.

So those are two sort of inflation hedging asset classes we include.

And then when you look within company shares, the UK stock market also tends to be quite resilient when inflation rises.

And this is partly because if you look at the sectors, you've got some big resource companies and mining companies in the FTSE 100.

But it's also because it's generally kind of a value market.

So it doesn't have the really expensive technology stocks that dominate America, and those tend to suffer more in years like 2022 when inflation rises.

So we've got that broad diversification trying to beat inflation over the long run and maximise returns but not have all our eggs in one basket.

Yeah.

Okay.

Great.

That makes sense.

And then finally, Trevor, I know you've managed money for a number of decades now, and they always say history doesn't repeat itself, but it rhymes.

In terms of what you're seeing in terms of your outlook short to medium term, do you think there's anything different that we're seeing?

What should we be looking out for as investors over the next few months?

Well, we always think about the business cycle in terms of the big picture for investors.

And having the spread of investments makes sense, but you can invest actively.

What that means is if you think you're in economic recovery, you can buy more company shares.

If you think inflation is about to surge or is surging, you can add a bit more to the commodities.

And the way we think about that is something we call the investment clock, which is a way of linking the business cycle to what's happening to growth and inflation.

Where we are at the moment is actually a situation where global growth is all right. I mean, America's been quite robust.

We're getting a bit of a pick up on activity, although a little bit modest in places in Europe.

But inflation is beginning to look like it could pick up again with commodity prices rising this year.

So there's some kind of risk that you get central banks not cutting interest rates as hoped, maybe even at some point raising interest rates.

For us, that makes us still quite nervous about the government bond market, which tends to get hurt by inflation.

We've got money shifted tactically into commodities.

As far as stock markets are concerned, stock markets can do well or they can get hurt a little bit by inflation. It can come and go.

So at the moment, been quite tactical about stock markets and we've been generally shying away a little bit from the more expensive US market in favour of the UK and Europe. Yeah, great, excellent.

Well Trevor, as ever, thank you very much for your perspectives. Thank you.

Thanks, Kully.