Investing Beyond the Short-term: The Changing Landscape of Inflation

Most investors only focus on short-term factors and ignore the importance of long-term trends. However, if one understands long-term economic changes, the effectiveness of stock selection and asset allocation may double.

For example, in the 1980s, the two most important structural changes were that former Federal Reserve Chairman Volcker raised interest rates significantly to 18% and brought emerging market productivity into the global market. These led to a decrease in inflation, a long-term decline in interest rates, and soaring asset prices. If investors had been steadfast in holding long-term bonds, stocks, and real estate since the mid-1980s, they would have easily achieved good returns.

The past is gone, what about the future? Investors may need to be prepared mentally: the era of low inflation has passed. While a return to the extremely high inflation rates of the late 1970s is unlikely, it is also unlikely that inflation will remain at the low level of around 2%. This is due to three main reasons.

First, the global age dependency ratio has reached a turning point. This ratio has been declining for the past half century or so, indicating that the population of dependents (those under 15 and over 65) is decreasing compared to the working-age population. Dependents represent the demand side of the economy, while working-age people represent the supply side. When the supply of goods and services increases while the demand for them decreases, it becomes difficult for prices to rise. This partly explains why inflation has been relatively low over the past 30 years.

According to the United Nations World Population Prospects study, the dependency ratio stopped falling about 10 years ago and entered a stable period. And it is projected that from 2027 onwards, the world population dependency ratio will rise. High-income countries and China have already seen an upward trend of this ratio since the global financial crisis in 2008.

At the global trade level, companies can still migrate their supply chains from China to Southeast Asian countries for cheaper labors and lands, but it can be foreseen that controlling costs will become increasingly difficult in the future. The shortage of manpower has put pressure on costs in the service industry in Western countries. In the past few years, Western countries have continuously postponed retirement age, not only because of insufficient pensions, but also because of manpower shortages.

Second, the costs associated with environmental protection will continue to rise. For example, China plans to achieve peak carbon dioxide emissions by 2030 and carbon neutralization by 2060. Either installing emission reduction equipment or purchasing carbon emission rights in the market will increase corporate costs, which will eventually be reflected in prices.

Third, the political differences between China and the West will intensify, leading to deglobalization and increasing production costs. The benefit of globalization is that each country can maximize its strengths, be responsible for producing its lowest-cost products, and then sell them to other countries through trade. This process naturally helps to suppress inflation. In the past few years, the trade war between China and the United States has intensified, and the Covid-19 pandemic has also exacerbated the situation. Therefore, the trend of deglobalization will continue, which will push up production costs.

Investors need to consider how the above assumptions would affect global investment markets, including China. Over the past few decades, many people have complained that while the economy is strong, only the top 1% of people benefit, and most people’s actual wages have not changed much. However, if labor shortages worsen, employees’ bargaining power will also improve, which means that income distribution within companies will gradually shift from shareholders to employees, and profit growth may be slower than economic growth.

So what industries may benefit in the new era of relatively high inflation? When the labor force decreases relative to the dependent population, companies may need to invest more in equipment to remain competitive, which should benefit equipment manufacturers. Inflation and rising interest rates are typically advantageous for banks.

However, artificial intelligence is developing rapidly, and if it can replace part of the jobs, the problem of rising dependency ratios may be delayed, which may elevate the inflation pressure.


This document is based on management forecasts and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. In preparing this document, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. All opinions or estimates contained in this document are entirely Zeal Asset Management Limited’s judgment as of the date of this document and are subject to change without notice.

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