The world has seen unprecedented levels of money printing since the depths of the GFC. Along with record low interest rates, many investors are concerned that this can only lead to one thing – inflation. When you experience inflation, the value of investments (such as cash) may be eroded. It is therefore important for you to recognise which asset classes will prove resilient, or even benefit, from a breakout of inflation.
High inflation means that the cost of goods and services has increased and the purchasing power of consumers is diminished. Inflation can be bad for consumers as high prices make basic necessities more expensive. This leads to the household budget being stretched. However, even in periods of high inflation, there are still stocks in the share market that perform well. These are the types of stocks that perform positively in a high inflation environment.
Types of Stocks That Perform Well
1. Gold Stocks
Investors turn to safe haven investments such as gold stocks when they see high inflation in the economy. When there is economic instability, investors traditionally look to hold gold. High inflation would cause investors to want to safe guard their investments by buying gold stocks. Holding cash in bank accounts is a bad idea in this environment. The purchasing power of this cash in the bank will be eroded when inflation heads higher and higher.
2. Oil Stocks
There is a positive correlation between the price of oil and inflation. The consumer price index helps measure the inflation in the economy by tracking a basket of goods and services by households. This would also included Energy costs in households. As the oil prices increases, this directly affects the energy costs spent by consumers. This would lead to an increase in the CPI index and then inflation. Oil stocks should do well in this environment.
3. Consumer Staples
When there is high inflation, companies will pass these costs onto the consumers. For instance, companies with higher energy cost from increased transportation cost or higher operating costs will pass these costs to the consumer. Therefore, all good and services will become more expensive. Consumers will become more selective when purchasing goods and services as they have less purchasing power. Consumer staples or basic goods will still be in demand in a high inflation environment as people will still buy bread and milk, even if the costs increase. Companies in consumer staples know that even if they increase the price, consumers will still need to buy it. Consumers will stay away from non-essential goods and services such as a new TV or a new car. As a result, most consumers will only spend what is necessary. This means that investors should consider avoiding consumer discretionary stocks.
Utilities are defensive stocks as people will need utilities even in a high inflation environment. When operating costs rise for energy companies, they will pass these higher costs onto consumers and maintain their profit margin. Consumers will have no choice but to pay this inflated cost if they want to continue to receive the power. Demand in utility companies will still be strong even in high inflation periods.
Stocks which are considered defensive, such as healthcare, can be considered safer investments. This is because people will always need healthcare even when consumer budgets are tight. Investors will sell out of high risk stocks and buy into low risk stocks in high inflationary periods as these are deemed safer. Just like groceries in a supermarket, people will always need medicine and medical treatment. Consumers will place priority in spending on healthcare as opposed to less crucial goods and services.
Lauren Hua is a private client adviser at Fairmont Equities.
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