Inflating profits, deflating wallets.

Stropro Team
Stropro
Published in
5 min readMar 7, 2022

Also included in this article: me flexing my newly acquired Australian slang.

“Real wages are falling, and we expect this to continue for much of 2022, reducing household purchasing power.”

That caught my attention. Headlines and social media were telling me that wages were going up, fueled by the ‘great resignation’ and reduced migration. They are of course, but not more than inflation. These mixed messages prompted me to do a small dive into the current state of affairs.

“Heed our warnings”

Australian execs have warned the markets that inflation is here.

BHP and Rio’s CEOs have warned investors and the wider economy that future costs are rising.

Closer to home, my local Woolies (“Countdown” for my Kiwi friends) has seen some increasing prices. This coincides with warnings from Woolworth’s CEO Brad Banducci.

On the roads, look no further than Transurban, whose CEO has been positioning the firm for an inflation onslaught. While his costs might climb, expect any road tolls we pay to climb alongside them. It already costs my colleagues more than a ‘Schooner’ (Translation: Beer glass slightly smaller than a pint) to drive a few kms. Aussies seem to love their tolls!

Commodity prices are also reflecting this sentiment, especially with Russia’s invasion of Ukraine. Bloomberg’s Commodity index and the S&P GSCI are up 40% and 60% respectively since March 2020.

Companies spanning from the literal coal face, right to the supermarket shelf are seeing inflating costs. These costs will inevitably find their way into the consumer’s pockets (and mine), but that’s okay because wages are inflating too right?

Straining wages

Yes, technically. Wages are gradually increasing but not evenly across every industry (ask any teacher or nurse you know). Retail led quarterly wage growth in Australia last quarter followed by Information Media/Telecommunications and Hospitality.

Only Hospitality outpaced inflation over the year, although given the reduced hours due to shutdowns that seems dubious.

The result of this is a falling ‘real wage’ (the relative amount of goods your wage can purchase). ANZ’s senior economists Catherine Birch and Adelaide Timbrell said:

“Real wages are falling, and we expect this to continue for much of 2022, reducing household purchasing power”

So… the costs of living are increasing, house prices are out of control and wages aren’t growing at the same rate. Should make for a fun election in Oz!

Record profits

Despite the 3.6% inflation seen in Australia in 2021, most companies are still hitting record earnings. The profit margin of the ASX200 was sitting at 15.31% on 31/12/2021(Bloomberg Terminal), the highest level since 2007.

Here’s a snippet of the EBITDA margins of companies I mentioned earlier:

  • BHP up 4% (to 64%) on the half year;
  • RIO Tinto up 10% (to 59%) from February 2021;
  • Transurban up 3% (to 66%) on the half year;
  • Woolworths down 18% (to 4.3%) on the half year.

So, many companies on the ASX have passed inflation down the line, perhaps with a little bit of extra margin added on top. This hits the consumers’ pockets, but not their wages.

Without sounding too radical, it’s funny to hear some CEOs warn of inflation’s impact but then boast about their record earnings in their quarterly presentations.

I’m certainly going to keep my eyes on this trend. How long can the consumer bear the brunt of inflation while their wages are decreasing? I’m sure economists are keeping tabs on consumer spending and the elasticity of these inflating goods.

Navigating the environment.

Please note this is not financial advice.

Fixed Income?

The forecasted rate hikes aren’t looking to outpace inflation, so cash is still being devalued. They’re still a safe place to preserve your capital, but with inflation, tax and probable rate hikes an investment in bonds isn’t exactly going to land you on any rich lists..

Equities?

Listed equities will continue to have a place in most portfolios, but they may not be the same beast we’ve seen over the past 10 years.

Although there has been a recent dip in markets, we are still seeing some large valuations. Wall Street Analysts are infatuated by strong top and bottom-line growth, fueled by high liquidity and also inflation-related price hikes.

The workers and consumers (‘Main Street’) may not reflect the same sentiment. They are feeling the strain on their pockets. We’d expect that either consumption goes down, or wages go up, threatening companies’ earnings.

Are alternatives the solution?

Historically portfolios with heavy alternative asset weighting have generated high returns with lower volatility. Source: KKR

The low correlation of alternatives to listed equities and bonds allows these portfolios to thrive, even when traditional markets are being beaten down by inflation and interest rate fears.

The strong tailwinds for Alternatives have led to massive growth in the asset class, here’s an excerpt from an article by one of Stropro’s founders.

“Over the last 10 years, the alternatives sector has experienced a significant expansion. It has proven its adaptability, long-term resilience, and most importantly, its low correlation to traditional assets. In 2010, alternative assets under management (AUM) clocked in at $4.1 trillion globally. By 2021, this number had increased to $11.8 trillion.”

Inflation is scary. The behavioural and economic dynamics behind it can be daunting and complex for any investor to navigate.

Ray Dalio kept investing simple:

“With fifteen to twenty good, uncorrelated return streams, you can dramatically reduce your risks without reducing your expected returns.”

Stropro is here to provide some of those streams through access to quality alternatives.

By Rory Turner.

This article has been prepared by Rory Turner. Rory Turner is an Investment Analyst of Stropro Operations Pty Ltd (ABN 28 633 603 399) (Stropro). This article is for educational purposes and is not a substitute for professional and tailored financial advice. This article expresses the views of the author(s) at a point in time, which may change in the future with no obligation on Stropro or the author to publicly update these views. This article uses information from sources the author considers to be reliable but does not represent that such information is accurate or complete, or that it should be relied upon. Past performance is not a reliable indicator of future performance. Investments may rise and fall in value and returns cannot be guaranteed. Stropro makes no representations or warranties, express or implied, as to the accuracy or completeness of the information it provides. Stropro Operations Pty Ltd (ABN 28 633 603 399) is a Corporate Authorised Representative (CAR №1293257) of Stropro Compliance Pty Ltd (ABN 74 640 214 740, AFSL №533443).

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Stropro Team
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