The November edition of The Informed Investor provides an overview of the market themes making headlines recently and what they could mean for your investments.

Whether you’re the kind of investor who glances at headlines occasionally or the kind whose breakfast is coffee and the morning news, you may have noticed a few persistent themes over the course of the pandemic. Though we’ve been hearing about them for a while, the discussion on the disruption of global supply chains and inflation pressures has heated up recently. We give an overview of how these situations have developed and what they could mean for your investments.

The disruption of global supply chains

The pandemic continues to have a significant negative impact on global supply chains. Other contributing factors include the speedy recovery in consumer demand compared to the slower recovery in supply, an increasing proportion of consumer spending on goods (that need to be shipped) versus services, and labour shortages.

RBC Wealth Management explored the impact of supply chain issues on equity markets in a recent article, concluding that the markets may experience some further ups and downs and relatively lower returns over the next year due to these issues.¹

While there’s still a lot of uncertainty about how supply chain issues will evolve globally, RBC GAM’s chief economist Eric Lascelles pointed out that increased shipping costs and shortages should lessen with time. And on a background of continued economic growth and increased consumer demand, the decreasing supply chain pressures should be pro-growth and deflationary.²

Inflation pressures

For now, we continue to see higher than average inflation driven by high energy costs and housing market prices.³ In Canada, the price of cars and homes has driven half of inflation growth, while prices for clothing, communications, and mortgage interest costs remain lower than pre-pandemic levels.⁴

Lascelles anticipates that the short-term inflation pressures currently at work, like supply chain issues and high commodity prices, should be somewhat less intense in 2022, with inflation decreasing to more normal levels over time.⁵

The persistently high inflation we’re experiencing tends to create volatility in markets as investors try to anticipate whether central banks, like the U.S. Federal Reserve (the Fed) and the Bank of Canada, will respond by raising interest rates earlier than expected. Higher interest rates tend to have a negative effect on equities, especially in certain sectors like technology, yet equities are also known as good protectors against inflation over the long-term as they tend to outpace inflation over time. For more details on inflation and how it affects your investments, check out this article by our partners at RBC GAM.⁶

What do inflation and supply chain issues mean for your investment portfolio?

At RBC InvestEase, you’re invested in a diversified investment portfolio that’s been matched to your financial goals and investor profile. Your investments are made up of companies and industries that experience different effects on their profits and market value as a result of inflation and supply chain issues. Companies that are better able to pass on the higher production and distribution costs to the consumers are less affected by inflation. And when it comes to supply chain issues, some sectors like health care and information technology seem to be less affected by the issues, while the consumer discretionary, materials, and industrials sectors are experiencing major-to-moderate effects, according to analysts.¹

It’s important to remember that inflation and supply chain problems are only a couple of the factors impacting the value of your investments now and how they will perform in the future. That’s why diversification is a key feature of your RBC InvestEase portfolio. It’s designed to give you a comfortable path towards your goals, whatever the headlines of the day may be.