Cash can be a very useful asset, but it depends on how quickly central banks increase interest rates. In most countries today, interest rates are below inflation rates and not yet terribly attractive.

Commodities have historically performed well in an inflationary environment. This is one of the reasons why South African equities were strong over the past couple of months and the rand has held up so well despite the anxiety over the war in Ukraine. The JSE is of course home to large mining companies and the rand is generally viewed as a “commodity currency”.

Property can be a good inflation hedge since rental income tends to rise with inflation. However, building and maintenance costs also rise in an inflationary environment and can be a drag on income. Crucially, large parts of the property sector have not yet recovered from Covid-19 with many buildings still vacant.

Therefore, looking within asset classes also matters and it is important to find companies that have pricing power and can increase their selling prices as input costs rise to grow margins. In contrast, companies that are price takers – who have to sell at whatever the prevailing market price is – are forced to cut costs in this environment to maintain margins.

Companies with pricing power are usually typified by strong brands, resilient business models and healthy balance sheets. Valuation is also important. If everyone desperately wants to invest in companies with pricing power, share prices might become stretched relative to companies’ fundamentals. It might then be better to look at companies that are vulnerable to inflation and therefore have a huge amount of bad news priced in.

Few of the big game-changing inventions of the past decade – smartphones, social media, cloud computing, ride-hailing, etc. –were predicted in advance. Sometimes, the building blocks are there, but it requires vision to put them together. Other times, one invention leads to the next and it is only at the end of a long chain of incremental improvements that we suddenly realise we have a game changer. The opposite is also often true: there can be a huge amount of hype around new inventions – currently it is crypto, but also artificial intelligence and other technologies lumped together under the 4^th Industrial Revolution. Often, investors get carried away and are prepared to pay absurd valuations to secure a piece of the action which guarantees disappointing returns.

There are several ways that we at Old Mutual Wealth get a sense of how innovative a company is. Some companies disclose the amount of time their employees allocate experimenting on new opportunities or the percentage of their staff complement that focuses on new innovations. Others assess the percentage of sales a company generates from new products or services. A third indicator is the amount of money the company spends on research and development. Given that a large portion of research and development is funded through the income statement, investing aggressively for the future often detracts from short-term profits. Companies that are willing to make this trade-off are in our view best positioned to innovate.

A softer indicator of a company’s ability to innovate is its CEO and the company’s culture. Businesses that have demonstrated their ability to innovate in the past are more likely to continue down the path of innovation. In practice, this often means backing those companies that have a track record and culture of innovation which includes a tolerance for failure. What is not always understood about successful innovators is that they will have a string of failures under their belts but are prepared to learn from their failures.