Wednesday, January 19, 2011

Inflation and inflationary expectations rising

Hong Kong's CPI is expected to have rising 3.0% year on year in December 2010. Expectations are that year on year CPI increases will increase further are now widespread. At least one economist has stated that CPI could reach 5% this year.

Leaving aside the issue of whether CPI is an accurate proxy for either inflation or cost of living, it does not take much investigation to understand where the increased CPI numbers come from. Food prices, airfares, entertainment, rents and school fees have all gone up noticeably over the last year. Utilities have gone up, but not by as much. Management fees and a number of other items have also risen, but in some cases the increase is from levels last set more than a year ago. I can't think of anything that has gone down.

Bank deposits still yield close to zero. Mortgage interest rates are still below 1%. You have to go a long way out in terms of maturity to beat inflation on HKD bonds (or sacrifice credit quality). It's not hard to see that it pays to be a borrower and not a lender in this environment.

Longer term, if I have to raise the expected inflation rate used in my retirement plan I must either (i) delay retirement so that I can accumulate a bigger pool of assets or (ii) raise the nominal expected rate of return on my investments. The former would be disappointing and the latter is only partly within my control. While I need to do some more research, my understanding is that in the short run rising inflation can be negative for companies although in the longer run they tend to survive inflation better than bonds. In both time frames, other factors can outweigh the inflation effect.


JD said...

Hi, I just discovered your blog today; lots of interesting entries there!

I am interested in small/smallish caps and own some of those you do do eg Allan, Tai Cheung, and varitronix. I also have some Midland, Alco, K. Wah, and Shui On Land.

Do you have yours eyes set on any other property company or other small caps at the moment? Any plan to continue buying some Tai Sang currently at 3.87?

Thanks for your lovely blog!

traineeinvestor said...


Thanks for dropping by.

Midland is one that I have looked at several times - I'm just finding it too hard to get a feel for how hard the reduced transaction volumes for HK property will hurt them and how long it will take for volumes to recover. I haven't looked closely at the other companies you mention.

I have a watch list of stocks that I like or am still doing the resaerch on (some large, some small) and hope to keep adding to the portfolio during the course of this year. While the market gains over the last two years have been great, unfortunatley it has got a lot harder to find stocks that are genuinely cheap.

I am neutral on whether to add more Tai Sang to the portfolio.


JD said...

I like your blog very much, the content and style make for very good reading. Does your blog start in July 2006? I cant seem to find the first entry. I am going to read your blog like a book from old to newest entries!

Also, is there any chance you might post an entry detailing roughly your portofolio eg % in different asset classes, and composition of your share portofolio?

I appreciate your value approach to investing, and also your openness to different asset classes and inclusion of value small caps in your portofolio.

traineeinvestor said...


The first entry was in April 2006 :

If you're going to read everything, you might well reconsider whether my blog is worth reading.I've got a number of things wrong along the way (as you would expect for a trainee), but then two of the purposes of doing this are to hold myself accountable for what I am doing and to force myself to articulate what I am doing (or not doing) and why.

I've been intending to review at least that part of the portfolio which is invested in individual shares for a while now - unfortunately work and other commitments have delayed that project. I'll try and make a start next week.


Zarathustra said...

Inflation is really everywhere. That's probably why HK property is still rising despite being really expensive. Real assets tend to do well in increasing inflation expectation.

Though I am bit worried that China will tighten aggressively, which will kill off its property bubble and lead to slowdown. If that happens, I don't see much luck in Hong Kong economy... of course I always sound too pessimistic

traineeinvestor said...

Yep. Inflation is everywhere.

In the 10 years ending December 2010, HK CPI went up somewhere between 5.6 and 7.8% in total (depending on which data series you use).

We are now seeing annualised inflation (as measure by CPI) running at more than 3% pa - this is a significant increase in the rate of inflation and has very significant implications for everybody.

As to China - who knows. I'm not too worried about tightening as they can always ease the controls if they need to. What I a worried about is erosion of business margins and overseas buyers and manufacturers turning to other countries for low cost products and production. This will be at least partially offset by rising domestic consumption so it remains to be seen if we see much of a slow down in China or not. I've no idea but at the moment, the PRC equity markets are priced at below long term averages which suggests that a fair amount of pessimism is already priced in.

Then again, perhaps I'm too optimistic.