How investors can cash in despite rising inflation
YOU CAN cash in on inflation: top fund bets on companies that can raise their prices to offset rising costs
- Inflation will likely prove to be the biggest story of the winter for investors
- Latest data – often from the US – sparks new fears of rising costs
- Markets shocked as investors worry central banks may need to raise interest rates
- Major Indices Can Drop As Much As 2% – Before Slowly Recovering
Investors can be forgiven for thinking the markets are stuck on Groundhog Day. Over the past few months, the same story played out repeatedly.
First, we see that data releases – often from the US – are raising new fears of rising costs. This in turn deters markets as investors worry that central banks could raise interest rates sooner.
Major stock indices usually fall sharply — sometimes by 2 percent — before slowly recovering their losses.
Spiral: Latest inflation data – often from the US – sparking new fears of rising costs, scaring markets as investors worry that central banks may need to raise interest rates
Inflation will likely prove to be the biggest story of the winter for investors. But should it be a drain on your wallet?
One of Britain’s best-known fund managers has revealed that he hopes to profit from inflation. Stephen Yiu is the manager of Blue Whale Growth Fund, a £1 billion equity fund known for betting on tech giants. The fund has performed very well over the past five years, turning an investment of £10,000 into £18,500.
Mr Yiu predicts that rising inflation will force central banks – in the US and UK – to tighten policy. In response, the fund is betting on companies that can raise their prices to offset rising costs.
The largest participation is Microsoft, which accounts for almost 8 pc. of the fund. The company plans to increase the price of some of its most popular packages, including Office365, by up to 25 percent.
But Yiu predicts that Microsoft’s market dominance means customers will have little choice but to pay the difference.
His fund also seeks support for companies with low external costs relative to income.
The logic is simple: The less money companies spend on supplies, the less they suffer from rising costs. That’s why the fund also supports Facebook – or Meta as it is now known – as well as Visa and Mastercard.
Essential: Titan for consumer goods Unilever is traditionally seen as the largest inflation shield of the FTSE 100, due to its ability to pass costs on to consumers
There are options closer to home for those looking to take advantage of inflation.
“You have to ask yourself how rising input costs – including raw materials and labor – will affect a company,” said Rob Morgan of investment platform Charles Stanley.
“Companies with high demand for products and services should do well because they can raise their prices to cover costs.”
The titanium of consumer goods Unilever has traditionally been viewed as the largest inflation shield of the FTSE 100, due to its ability to pass costs on to consumers.
Still, the Anglo-Dutch company has not had it easy with the pandemic disruption. The share price is currently 13.62 percent lower since January and 16.9 percent lower than its pre-Covid price.
But there are other golden rule options within the FTSE: companies with a strong customer base and smaller capital expenditures.
Accounting software company Sage is an option. As a technology company, its cost of capital is low and, like Microsoft, it can pass on price increases to its customers. The share price has risen 34.57 percent since January.
With its bargaining power over suppliers, Tesco can mitigate the effects of inflation. The price has been steadily rising lately — up 23.96 percent in six months — but remains low (at 13.91 percent) at pre-Covid levels.
When rearranging your portfolio, keep the fundamentals of investing in mind. Most importantly, don’t get distracted by short-term noise and only invest in companies that you believe can perform in the long run.