4 experts offer tips on where to invest during inflation

Inflation is growing at a fast pace so we asked four experts where you should invest when inflation is high. Here’s what they had to say.

Chris Batchelor

A high inflation environment presents a number of challenges for listed companies. But there are also opportunities. Certain companies will be impacted less than others and those that make the right strategic decisions can gain an advantage over their competitors.

Inflation leads to increasing interest rates as monetary authorities try to quell demand. That means companies with high debt levels are more exposed and, conversely, companies with little or no debt are more immune.

A company’s profitability is determined by its profit margins. Inflation will cause a company’s cost base to rise, however, if they are able to increase their prices by a commensurate amount without reducing demand then their margins can be maintained. In some cases, increased costs from suppliers will be passed on to customers dollar for dollar, resulting in a lower margin percentage but the same dollar profit. In other cases, they will be able to increase prices in a way that the margin percentage is maintained resulting in increased dollar profits. The ability to do this is a function of a company’s pricing power.

Typically, companies that do well in higher inflation environments are commodity businesses – both hard and soft  – and supermarkets and value retailers. Consumers become more cost-conscious leading to an advantage for value-based offerings over their premium peers.

One business that is well-positioned for a high inflation environment is Wesfarmers (ASX:WES). Its retail chains Bunnings and Kmart are value offerings so they will be attractive to cost-conscious customers. Due to its scale, Wesfarmers also has an advantage when it comes to mitigating cost increases in its supply chain. This means it can either increase its margins or compete aggressively on price. These competitive advantages will place Wesfarmers in a strong position to gain market share from the competition.

Chris Batchelor (CFA) is the CEO of Spotee (AFSL 521404), a provider of sharemarket education, research and advice. He is an experienced leader and investment expert having worked in financial markets for over 25 years. He is qualified as a Chartered Financial Analyst and holds a Graduate Diploma of Applied Finance and Investment and Bachelor of Commerce Degree.

Chris Brycki

When inflation is high or rising one asset you want to have in your portfolio is gold. We have included the GOLD exchange traded fund (ETF) in the Stockspot portfolios since 2014.

The GOLD ETF is physically backed by gold bullion which is stored in a vault in London. It’s unhedged so investors are also protected from a falling Australian dollar.

Gold has proven to be an asset class that preserves its value and acts as a hedge against inflation. When inflation rises, the value of paper money declines (also known as currency debasement), and commodities such as gold help protect against this because they have a limited supply. Gold has historically performed best when there are negative real interest rates which occurs when inflation is higher than prevailing interest rates.

In today’s environment of artificially low interest rates and rising inflation, gold is likely to provide better portfolio diversification compared to government bonds.

Unlike other commodities such as iron ore or oil, there’s little industrial use for gold. It doesn’t power our electric vehicles or enable the production of steel for buildings.

Most of the demand for gold in the world comes from either jewellery or investment. So when investors buy gold they are investing in an asset whose major use is simply as ‘an investment’ – and not much else.

We believe gold should be a key part of every diversified portfolio regardless of your investment horizon or risk capacity. It’s the part of your portfolio you’ll be glad you have when the rest of the investment world isn’t shining due to inflation.

Chris Brycki is the Founder and CEO of Stockspot (AFSL 337927), Australia’s largest online investment advisor. He has sat on two Advisory Committees for the industry regulator ASIC, and was previously a fund manager at UBS. He holds a Bachelor of Commerce (Accounting/Finance Co-op Scholarship) from UNSW.

Evan Lucas

Rising inflation is something we have forgotten is part and parcel of normal long-term economic cycles. The increase in cost is detrimental to consumer and business spending as the population starts to tighten their respective belts – thus slowing the pace of economic growth (remember Australian consumption is about 65% of total GDP).

It’s why consumer discretionary, travel, luxury goods and property stocks tend to suffer in rising inflation markets.

On the flip side, there are sectors that are ‘semi-immune’ to inflation. These tend to be sectors that have constant demand – health and energy or sectors that benefit from the so-called inflation hedge – gold and precious metals in general.

There are also providers that tend not to be affected such as high-end engineering (mining service companies for example) and telecommunication providers as the internet and phone service are now considered essential. The same goes for education – it’s an essential service and one that tends to be unaffected by inflation fears.

There are several ways to invest in these ideas – sector ETFs are one or low-cost passive portfolios that target specific themes are another. You can invest in specific stocks such as Newcrest Mining (ASX:NCM) or Northern Star Resources (ASX:NST) if gold is what you are targeting.

However there is a large caveat to all this, the premium price you might have to enter these investments can actually offset the benefits. The sectors and stocks mentionED have already moved higher due to the current volatility and global uncertainty. What can also happen is that inflation can reverse just as fast as it started, and that premium price can unwind just as fast as it was created.

Inflation is something that all markets have dealt with over time – sometimes the best strategy is to remain strong in your long-term convictions and understand that long-term investing comes with short-term downsides.

Evan Lucas is head of strategy at InvestSMART (AFSL 226435). Evan has been investing and researching global markets for over a decade.

Scott Phillips

Inflation. It’s an issue we haven’t had to tackle – as consumers or investors – for the best part of three decades. But that was then. Now? Inflation is high and probably going higher, in the short term at least.

And that, combined with the resultant higher interest rates, has meant that investors need to think differently about the companies they’re investing in. In short, it’s made things more complicated, by adding more variables to our investment decisions.

Higher interest rates mean less profit for companies with significant debts. And it increases the risk of investing in those companies. And higher inflation is going to bite, too.

Frankly, it’s easier to find losers than winners from high inflation. If a company is confronted with higher costs, but can’t pass those costs on through higher prices, profits get crunched. Think about airlines, miners and undifferentiated retail products for example. If the price of iron ore is set globally, with no meaningful differentiation, it’s all but impossible to pass on higher costs. Ditto the price of an airline seat, in a world where oil prices and wages are both rising.

Winners? There are fewer, unfortunately. Inflation is like that. But those that should be less impacted – and which might even strengthen their underlying businesses at the expense of others – are those with pricing power. Think about the brands you love and the companies we can’t do without. If Apple, Coke or Nike put their prices up 3% to 5%, is it going to change our purchase decisions? Probably not. And like it or not, when a toll road is the easiest and fastest way to get around, a price hike is annoying, but we’ll probably just grin and bear it.

The other problem? Even if we know what businesses will do well (and poorly), so does the rest of the market; as ever, it’s the combination of business performance and share price we need to consider when looking for market-beating returns.

So what’s an investor to do? On top of the above, I reckon it’s important to look for growth (which helps offset rising costs) and quality (the products and services we’ll keep buying, even as prices rise). And it doesn’t hurt to look among the beaten down share prices, either – that’s often where you’ll find a bargain.

Putting that all together, I think the long-term future is bright for companies such as online furniture retailer Temple & Webster (ASX:TPW), pizza juggernaut Domino’s (ASX:DMP) (which I own), and investment conglomerate Washington H. Soul Pattinson (ASX:SOL) (ditto).

Scott Phillips is Chief Investment Officer at The Motley Fool (AFSL 400691) and runs the Motley Fool Share Advisor, Million Dollar Portfolio and Everlasting Income services. Scott holds a Bachelor of Commerce, a Graduate Diploma in Accounting. At the time of writing, Scott Phillips owns shares of Domino’s and Washington H. Soul Pattinson.

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