How to invest for long-term inflation
May 13, 2011 12:05 EDT
It’s no secret that food and energy prices are volatile and rising of late. Yet what’s missing from the latest inflation hand-wringing is what’s down the road. Some commodities are becoming scarcer and that will drive long-term inflation.
While few invest based on scarcity, it’s a prudent long-term strategy. This is not something that will turn up in the latest inflation numbers. In the most recent Consumer Price Index report, core inflation climbed at a 1.3-percent annual rate in April. Gasoline prices accounted for half the increase.
One long-term prediction that has slowly manifested itself over the past 30 years is the concept of peak oil. This theory — borne out by production figures — posits that we have passed the peak of petroleum production worldwide. New oil is not only harder to find, it’s in places that are tougher to access, such as miles below the ocean floor.
Is peak oil responsible for the recent $100/barrel-plus prices? Not entirely, since supply disruptions in the Middle East and speculation play a big part. There’s also the demand side: Developing countries like China, India and Brazil want their share of hydrocarbons for new cars, chemicals, plastics and fertilizer.
Some of the peak-oil thinking has already been integrated into urban planning in emerging economies. New public-transit systems are being built in 82 Chinese and 14 Indian cities. It’s extremely difficult to buy a car in either Shanghai or Beijing. If we’re indeed seeing the end of the carbon age, then mass transit is a positive development.
Speaking of transportation, more of it is greening due to the revolution in electric cars and batteries. Not only are cars becoming all-electric (great for short trips, which is how much people use them), they can go further on a single charge. Right now, no one can use them for long trips. With newer technology, that will change.
Long-term, greener vehicles mean lower transportation costs, which take a hefty bite of family budgets in an era of $4-plus-a-gallon gasoline and diesel.
Of course, it would be ideal if the bulk of electricity used to power green cars didn’t come from coal. But that, too, will depend on whether smart policy planners devise a national program for renewable power. At present, there is no viable, long-range clean-energy plan in the U.S. It’s all a hodge-podge now.
Another linchpin in world growth — somewhat reflected in the latest inflation figures — is that food will become more expensive to grow and distribute. Arable land is becoming harder to find and fertilizers made from fossil fuels will become more expensive. Developing countries are hurt the most by food/fertilizer inflation since they spend more than half of average household income on food — vs. one-tenth in the U.S.
What’s clear is that some of the key materials for green transportation and agriculture will also become scarcer. Money Manager Jeremy Grantham notes that “the world is using up natural resources at an alarming rate, and this has caused a permanent shift in their value.”
How would you invest for scarcity? You might want to focus heavily on natural resources such as minerals, metals and agriculture. Countries and sectors likely to prosper from these trends are worth holding in your portfolio through exchange-traded funds:
Global Agribusiness. The Market Vectors Global Agribusiness ETF follows an index of companies in this sector.
Industrial Materials. The iShares S&P Global Materials Index ETF tracks an index of commodity-related mining/manufacturing firms.
Australia. The island continent is blessed with abundant mineral resources. The iShares MSCI-Australia ETF follows an index of major Aussie stocks.
Argentina. The South American country is big in both agriculture and resources. The Global X FTSE Argentina 20 follows major Argentine companies.
Lithium. This pasty metal is the key component for high-tech batteries used in electric cars. The Global X Lithium ETF is a play on this important metal.
Investing in individual sectors and resources is not for the faint of heart, though. They are often more volatile than the entire stock market and not for short-term timing. A broader investment would be a fund like the Vanguard Total World Stock ETF, which samples companies from all over the planet.
While there’s not much you can do about inflation in the short term, there are plenty of opportunities for buy-and-holder investors, but only if you go beyond recent headlines.
blogs.reuters.com |
