Why “The Cantillon Effect” favours Investors!

Often referred to as the “Irish Banker”, Richard Cantillon posthumously became famous for his ‘Essay on Economic Theory.’ In it he theorised, when the state prints a bunch of money, it is the institutional setup of that state, that determines who benefits. In the 18th century, this meant the closer you were to the king and the wealthy, the more you benefitted, and the further away you were, the more you were harmed. But in today’s terms… The Cantillon Effect as it’s known is a change in relative prices resulting from a change in money supply.

So how is the Cantillon Effect at play in today’s investing?

Let’s say the US Federal Reserve decides to lower interest rates (which is expected to start this month or October) by expanding the supply of money in the economy.

Soon after the Fed makes its announcement, investors anticipate new earnings from increased investment.

In fact, once even a few people get wind of the Fed’s intentions, investors expect prices to rise, whether they rely on algorithms or rumours for their information. Investors flock to the financial markets, hoping to get there first.

If they can buy stocks while the prices are still low, they can reap enormous profits once prices rise.

However, the sudden increased demand for stocks in the financial market bids up asset prices. This happens rapidly. Within minutes, the expected increase in the price level has been factored into the financial markets.

That means the first place where “price inflation” is felt is in the financial marketplace. So, people who are most invested in the market are the first to benefit from this inflation. They see their asset prices increasing, yet the prices in the rest of the economy are still low.

So, what’s the point?

The Cantillon Effect favours early investors

In other words, as investors, we benefit from this “inflation” through rising asset prices.

Sitting on the sidelines, watching your cash erode due to inflation will destroy your wealth.

With interest rates poised to fall – not just globally – but SA too, now could be a great opportunity to put your money to work in the stock market. The many stocks on the JSE have rallied and we believe this is set to continue. If you’re looking for income, then our Real Wealth portfolio is a strong bet on the JSE with more than 2x the return of the JSE over the last 14+ years.