I’m trying to work out what happens to stocks during times of inflation, as my current plan is to stay invested during these interesting times - presuming that companies values will largely increase or at least balance out due to inflation of their assets. Is this a correct presupposition?
To be honest Orbital my opinion is that it’s like any other time in the market, some will do great, some will do poor and others may cease to exist!
I wouldn’t say there is a one size fits all answer to the question without been a bit more sector or even company specific. For example some REITs are struggling in particular with the high inflation and consequential high interest rate environment, on the other hand it’s giving a helpful leg up to banks.
Thanks Adam. Of course - I guess property rentals would suffer a lot more than say National Grid or E.on who are non-cyclical.
I am wondering if there are any non-cyclical stocks who’s assets would increase in value enough to allow the SP to match inflation?
As a slight aside, I bought a freezer from Currys 10 months ago for £199 and want to sell it now. I checked the same retailer this week and it’s price has increased to £299, despite them downgrading it to manual dial from digital, I presume due to the chip shortage! Maybe I’ll look at stocks in AO, as their SP has gained 55% in the last 6 months! Is this cost savings, price gouging, inflation’s actions on their assets or something else?
That depends on the price elasticity of the respective goods.
If the demand is inelastic, inflation+more can be easily added to the price. Examples would be oil, energy or luxury goods.
This has been priced in for a year now though, no beating the market with that strategy.
NAV should be unaffected or rise with inflation. Historically, stocks have been one of the best hedges against inflation.
Since have tried the internet and can’t find it, grateful if people can indulge my very basic question: what is NAV?
Net asset value
Thanks @SebReitz. That is really useful. I got a load of non-cyclical stocks when I first started investing just over a year ago and they seem to be holding up: BP, RR, DRX, EVR (00ps!)
Does NAV remain the same because asset values are made at the time of purchase, then the value of them written off against tax through depreciation, rather than updated to show their current value (like my freezer)?
Nav isn’t relevant to share price in an individual company it relates to funds that hold a basket of shares for instance city of London diversified trust £cty has a share price currently of £4.25. The value of the assets it had under management minus any liabilities had a closing nav last night of £4.15 so it’s trading at a slightly higher value that it’s assets. Hope this makes sense.
This Citywire video sums up NAVs well in relation to investment trusts.
I try to focus on buying quality trusts that are trading at overdone discounts then holding for the long term.
2022 was a great opportunity – I paid roughly 80p for every £1 in value which I’m hoping will significantly boost total returns on an NAV basis.
Ah yes, my error there. Shares, funds and trust prices really have very little in common with reality though, do they not? Or at least their asset value seems to be shifted in time with reality.
Thanks for the link @rehpot
When a trust is trading at a discount, would you hope that it goes on to trade at premium where you would then sell some years later? Do quality trusts fluctuate between discount and premium or do attempt to stay discounted?
I do wish I had read more about trusts when I first arrived here as I think I missed the boat on many good buys.
I’d never bank on a discount turning into a premium, or even that it will narrow although I’d hope it would. I think of a wider-than-usual discount as a margin a safety.
Some trusts try to control the discount by, for example, buying back shares – but others don’t, preferring to let their NAV returns do the talking.
Some stay at a wide discount for good reasons, eg Home Reit.
Private equity trusts are an example of what’s known as a liquidity discount – they’re generally always at wide discounts due to the underlying lack of liquidity that comes with unquoted companies.
However, it does happen. III and HGT, for example, have been on premiums before due to investor sentiment, regard for their management groups, and particularly strong track records.
While the discount/premium is a factor, it is only one part of the equation – knowing what you’re investing in and assessing how you think the assets will perform long term is far more important.
A silly question if I may…when we talk about premium and discounts …would I be right in assuming the discount is shown on a trust in the app as negative? I.e -10.3% and a premium is anything above 0?
Correct Matt 
It’s a shame that the FreeTrade app does not allow us to search for trusts based on their discount and other useful metrics. Have you found a fund with a 10.3% discount @mattgee or was it just an example?
So does the value (or discount) only become realisable by decreasing the cost of, and therefore increasing dividend yields?
This sounds like a discount is a bad thing or am I misunderstanding? Or does the fact that the illiquid companies’ assets are wrapped in a trust make the illiquid more liquid and therefore more tradeable?
I guess this sums it up really @rehpot (btw, is your forum name pronounced repo like repossession?). As so many say in the FT community, the market is not the economy, and we see crazy things happening based entirely on sentiment, and then even crazier things happening based on inverse logic! I’ve not watched funds yet as far as I have stocks in comparison to the news cycle, but presume that they are similarly eccentric?
It was just an example, I had looked at SMT earlier in the day after reading an article on its performance last year. I actually think it was at around -16%!
I agree though, I was wanting to search based on discount annoyingly when clicking on Discover in the app, nothing would load so had to do a generic search on ‘trust’ as a keyword!
You can sort trusts by discount on the AIC’s website.
It’s worth noting there can be a significant lag in the reporting of NAVs, particularly for more esoteric assets such as property and infrastructure. They’re valued less regularly, so you need to tread carefully.
https://www.theaic.co.uk/aic/find-compare-investment-companies?sec=&sortid=DiscFairCum&desc=false