BZW's rear-view mirror
THREE questions for investors. What do you think will happen to inflation this year? What do you think will happen next year? Is that good news for shares or bad news? Here is a specimen answer to the first: 'The City consensus is that at the end of 1990 the underlying rate of inflation will be between 51/2 and 6 per cent.' To the second: 'The Government will then be eager to create a pre-election boom.' These come from the latest edition of my favourite City annual, the Equity Gilt Study, from Barclays de Zoete Wedd. It has the rare advantage among City fore- casts of looking resolutely backwards. The markets are followed to or from 1918. Fixed-interest government stocks have been better investments than shares for a third of those years — or a less bad investment, for cash which earned interest was usually better than either. But when inflation looms, shouldn't we get out of our depreciating cash and into real assets and earnings — that is, into shares? It is not as easy as that. Though shares have provided a long-term hedge against inflation, they have always done better at times when inflation is low or falling, and when infla- tion took off in the 1970s, shares collapsed. I detected, in the sharp run-up in share prices last year and early this, a belief that inflation might make shares a two-way bet
— either an attractive investment or a safe refuge. BZW's answer to my third ques- tion: 'Inflation is bad for equities.'
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