What are the winners in the presence of still high inflation? The preferable actions are mainly of four types.
From 70% of the Turkey at 9% of the Spain: the overview of the rising cost of living on an annual basis it now borders on dramatic numbers. The overview of the countries saves only China, with a modest 2.1% almost from deflation, Japan (2.4%) and Switzerland (2.9%), although there are those who question the numbers especially in Beijing and surroundings, always not very transparent. Date now for discounted the inflationary realitywhich may last for some time yet, one wonders which sectors are suffering the least and therefore which equity sub-funds can benefit from it, offsetting somewhat contradictory effects for the real returns of almost all assets.
THEY DON’T HAVE IT
Given that current inflation is different from that of the past, the relative dynamics are unpredictable, although some signs – for example the increase in stocks of large distribution chains – suggest that in a few months the numbers could already fall. This does not exclude that it is necessary to evaluate the merchandise activities capable of withstanding a balance between supply and demand in full evolution.
- In first place are two extremely topical sectors after the beginning of the invasion of Ukraine: the defence and the IT securityin which a lot is being invested, with a strong business resilience and therefore an ability to hold prices, or rather to increase them if geopolitical tensions increase;
- In second place are the activities related to infrastructure, which are not only correlated to inflation but represent a hedge against all its trends, also because specific clauses are often included in the contracts between contractors and contractors. In the presence of inevitable increases in interest rates, infrastructure companies would obtain positive benefits on their financial statements over a period of 24-36 monthsmuch more than what happens for real estate, usually negatively affected by the increase in the cost of money;
- In third place comes a vast world of actions related to companies that are able to determine and impose prices on their customers. Some examples? The luxury car industry. Furthermore, companies active in the production of cosmetics, perfumes and personal goods with strong brands, especially if aimed at female customers, always willing to spend more in this area than in clothing;
- Finally – although “last but non least“- the world of energy transition, where huge investments are about to be concentrated that the market still largely undervalues. Renewables, electricity grids, the storage of hydrogen and energy in general, as well as the decarbonisation of the economy, are the most followed activities in this area.
ATTENTION TO PROFITS
A risk that is not yet adequately calculated by the equity world is that of the possible drop (in some cases collapse) in margins. Expectations for 2023 are so far high but many sectors are about to pay the cost of inflation grown without the production processes having been able to translate it into an increase in prices. This is a bit like what is feared is happening in China, which would justify the relative very low inflation figure, as highlighted above. The banking case is under fire in the Italian case. The intention of the Bce to put i dividends from credit institutions reports Covid at the time, although in this case we are talking more about a recalculation than a suspension, as happened then. Other sectors at risk are the automotive industry, energy distribution and services in a broad sense.
A MIX TO SAVE YOURSELF
This happens while the historic rule that stocks go up when bonds go down, which should have the effect that dividends become less attractive and coupons of bonds instead more attractive, is canceled, now there is the doubt that, despite the collapse of the stock market, the profitability of more generous stocks may decline, due to the economic implications of inflation. This forces consumers and therefore investors to change their consumption by doing less recourse to debt. The risk now is that in Western countries the growth rates of nominal GDP rise while the real ones fall, precisely due to the effect of the increase in the cost of living.
Hence total uncertainty about future market developments, which in recent weeks is reflected in a shrinking yield on US Treasuries, exactly when the Fed announces massive rate hikes. In reality it is difficult to predict what the real returns (i.e. free from inflation) in a year. The result is an increase in the volatility of all assets, with only one certainty: some equity sectors they will hold up better than the others. From a mix of these, i long fixed coupon bondsthrough multiple income staggered over time, ei bond “inflation” bought on the weakness, caused by the rate hike effect, a compromise with which it will be possible to face the second half of 2022 and perhaps a good part of 2023, both with skyrocketing inflation and its progressively contracting trend.
