Inflation at 4%+ valuation reset

Hi guys,

Thoughts on valuations being reset or adjusted?

Valuation in growth/hype are still stupidly high. (Those that understand risk management, financial modelling and risk/return investing will know what I mean).

The market is at an intersection, the following months of CPI (US, Europe and UK) will shape the next 5 years of investing in my opinion. That’s not something to panic about however It’s something we need to adapt to. The real question is, how high do we see inflation at and how stubborn will it be and if so when will central banks take action and step in? (Tapering and rate increases).

Personally I don’t believe in reported CPI due to way governments manipulate CPI data (hedonic adjustment, unequal weighting of basket of goods calculated, etc) in fact there are many economists that don’t trust CPI (after all inflation is Personal to you and what your habits are, where you live, how old you are etc). However it will increase none the less least in the short term.

I have come to the conclusion that no body knows and experts are on both sides with very valid points. And anyone confidently saying hyper inflation like M burry or other popular professionals saying inflation is temporarily actually don’t take into account that we are in a very unnatural position economically and in markets.

For me as a guess I believe inflation will sustain at least at 3% or more following a successful exit out of lockdown for the last time.

Higher inflation leading to higher interest rates means valuations have to be reset. What I mean is that we will need to use a higher discount rate, which also causes us to lower multiples = lower: EV/Ebitda, Price/FCF, P/E. Also in this scenario its harder to take om new debt which means more reliance on capital markets (dilution).

Sorry for the rambling, I just think we are now at the inflection point and the new few months will be massive. In my opinion economy forecasts shouldn’t be a priority the priority is always finding investments that provide you with returns (on paper) above the benchmark.

Estimates for May cpi Is I think is 5.2% annualised. It comes out Thursday. I am positioned mostly in value after selling most my growth stocks. I’m still bullish on public markets long term but if you know what your doing I personally believe its better to be an active investor rather than index investing - I’m not knocking indexing but there is a dogma that retail investors can’t outperform indexes consistently year after year which is a debate for another day. After all if your picking individual companies why are you doing it if its not to outperform your benchmark?

What are people thinking, are we heading to lower multiples, what’s your plan with inflation and how does it change if inflation lowers after summer or end of year?

Check out this guy, he has a good track record in rotating sectors over the last few years

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