Cost of Capital v. Distant Cashflow Projections
Our May 2021 update for Equitable Investors Dragonfly Fund includes commentary on inflation and the cost of capital. If it isn’t about “meme” stocks, most of the market commentary and chatter at the time of writing this update is about inflation. The US Consumer Price Index jumped 5% in May 2021 from a year ago, the largest annual gain since August 2008 according to Bloomberg. The debate continues over whether this increase in inflation is “transitory” and reflective of the re-opening of economies OR whether it reflects a more permanent shift. The argument matters not just because central banks will try to use interest rates to control inflation if it is persistently higher but because the return investors will require will need to increase for their capital to maintain its relative buying power. We included in the May 2021 update a chart published by Sanford Bernstein that we've used in the part when discussing with clients the impact of higher inflation and higher interes...