Who Makes Money in High Inflation Periods?
Inflation has been steadily growing since April 2021. In October, the Consumer Price Index jumped 6.2%. This figure represented the highest year-over-year jump since 1990. It’s safe to say we’re in a period of high inflation, so which stocks tend to do well in these times?
How Long Will Inflation Last?
Bank of England Governor Andrew Bailey has suggested that inflation risks were “two-sided” in the UK.
He believes that the tight labour market will push up wage demands and that monetary policy will be ineffectual at solving another inflation driver supply.
Across the pond, inflation is higher than in other developed countries like Australia, Canada, and Great Britain. For some, this is the result of giant COVID relief packages.
However, President Biden has made some hotly debated claims that his Build Back Better program will drive down inflation. As he might, because historically, inflation has been a considerable problem for many presidents.
Right now, it looks likely that inflation will continue well into 2022. So, what investments should you hold to do well in this climate?
Inflation-Protected Safe Havens
When inflation rises, investment returns take a hit. With the consumer price index at around 6.2%, even well-performing dividends lose their purchasing power.
Cash and bonds can become a liability during inflation. However, property investments can benefit from rising consumer incomes. Still, the housing market can stall if inflation gets too high. On the other hand, equities can be the safest bet — provided you choose the right sectors.
Which Sectors Are Best Placed During High-Inflation?
Since 1973, the energy sector has beaten inflation 70% of the time. The pattern has continued this time around, with oil and fuel prices shooting up dramatically. In 2021, S&P 500 Energy stocks have risen more than 53%. Over the same period, the S&P 500 has returned a little less than half of those returns (25%).
Real estate investment trusts (REITs) are another equity that can beat inflation. Real estate investment can provide a good hedge against investment because it benefits from the attendant property price and rental cost increases.
Financials present an attractive hedge against inflation. Tech stock performance has been solid over the last decade because they promise excellent future earnings.
However, high inflation makes these future earnings look far less appealing. On the other hand, financials tend to concentrate their cash flows in the short term.
Of course, inflation can hurt banks too by lowering the value of existing loans.
Some of the best stocks to invest in during periods of high inflation are consumer staples. Essentially, these types of businesses can pass their higher production costs onto consumers. People need to eat, and they are tolerant of a certain price elasticity in food goods.
Much of our recent inflation is caused by supply issues. COVID has hit production and shipping, leading to raw material shortages. For savvy investors, this presents an opportunity. If raw materials shortages are causing a rise in prices, buy price-sensitive metals like copper.
Additionally, copper is used in a variety of technologies like IT and electric cars. As a result, we can expect it to benefit from long-term demand.
Industrials like capital goods and transport and logistics offer some exciting opportunities. Fuel costs and supply chain issues are two negatives; however, these can be offset against increased demand like online shopping and global trade.
Additionally, rising earnings estimates across most sectors have kept S&P 500 prices high. Many Industrials have solid fundamentals, which is vital in this context.
Equities have stayed strong despite inflation worries, while analysts remain convinced that current levels will drop. This confidence is reflected in high asset prices, which according to Nicholas Colas, co-founder of DataTrek Research, would be much higher if there was a strong belief that inflation would stay at current rates.
For stock pickers, inflation could present an opportunity. The price of goods and services isn’t correlated to the headline inflation rate. Sectors that historically outperform inflation are a good bet. However, it’s worth considering that per the Shiller index, many equities are overvalued and may produce depressed returns over the next decade.
Indeed, while rising inflation isn’t good news for equities, it’s not all bad news. Several sectors will absorb rising costs, with others set to benefit from price increases. Understanding which sectors have held firm in the past should be part of any solid investment strategy.
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Alpesh Patel OBE
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