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'Inflation will prove worth of businesses we're investing in'

'Inflation will prove worth of businesses we're investing in'

The manager of BlackRock Smaller Companies Investment Trust has said shortages of labour and supplies and the resulting impact on the economy concerns him more than the issue of rising inflation.

Roland Arnold said that due to the number of issues faced by the UK economy over the past few years, including Brexit and the pandemic, inflation figures are hard to interpret.

“My personal view is that it’s really hard to pull out any true underlying trends in inflation data, whilst we're going through these really kind of unprecedented year-on-year effects,” he said. 

“I expect messy inflation numbers for a while, [and although] I'm still not entirely convinced that there's massive structural inflationary pressure coming through there is definitely inflation.”

Arnold explained his concerns lie not with inflation, but around shortages.

“I’m more concerned about supply interruption, and about labor shortages,” he said.

“And that will again have short term impacts on inflation. But ultimately, I'm concerned about whether they can fill those shortages, not whether it costs more.”

He added inflation might actually benefit the trust, as it is “investing in businesses that have pricing power. 

“And if they do, then actually a bit of inflation is quite helpful, [because] your revenue is going to grow. 

“So to an extent, I'm sort of hoping for a bit of inflation to prove the worth of the businesses that we're investing in.”

Arnold runs the BlackRock Smaller Companies Investment Trust, alongside the open-ended BlackRock Smaller Companies fund.

The trust has seen net asset value performance of 27.7 per cent in the past three years, compared with the benchmark, the Numis Smaller Companies plus AIM (ex Investment Companies), which saw a performance of 18.3 per cent.

The inflation debate

Since the development of an effective Covid-19 vaccine was confirmed in November 2020, market participants have been anticipating a rise in inflation driven by economies re-opening, government spending increases and historically low interest rates.

However, despite inflation hitting 2.4 per cent in June - above the Bank of England’s 2 per cent target - the central bank has said it thinks price growth will be “transitory”.

The monetary policy committee did concede rising inflation was now expected to be more pronounced than previously expected, however it added it did not intend to tighten policy “until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2 per cent inflation target sustainably”.

M&G’s Andrew Eve said this week that the 'reflation' theme remains a core focus for the company's bond managers despite recent doubts over the permanence of consumer price growth.

Eve, an investment specialist in M&G's fixed income division, said in a presentation on August 12 the asset manager's inflation-linked bond team was still “bullish” on the reflation trade's prospects.

“It’s not an absolute certainty that we’ll see higher inflation going forward, but certainly in [the past decade] it’s the most bullish we’ve felt on the prospects of more of a medium term reflation scenario,” he said.