Business

UK equities to protect your portfolio from rising inflation

Games Workshop, Rightmove and Ocado are among London-listed stocks best positioned to protect investors from rising inflation, a new study finds.

Analysts at Peel Hunt said in a recent research note that there were few historical comparisons to the UK’s current “stagflation” as the country suffers from sluggish growth and a potential for inflation of more than 10 percent.

It is therefore difficult to assess the likely impact on specific sectors in general, and investors must instead look for companies that are able to withstand rising costs and weakening demand.

Inflation is putting pressure on margins in the face of a drop in demand, meaning companies that can successfully pass on price increases will do better than their peers

'Sterling 5y5y swap rate is a good indicator of moves in longer-term expectations': The major FTSE sectors with the highest positive and negative correlations with the swap rate

‘Sterling 5y5y swap rate is a good indicator of moves in longer-term expectations’: The major FTSE sectors with the highest positive and negative correlations with the swap rate

The outlook has worsened over the past week on disappointing new data showing GDP growth slowing to just 0.1 percent and CPI inflation rising to 7 percent, above expectations.

Peel Hunt’s lead researcher, Charles Hall, said: “This is a unique situation, so looking back in history to see what’s happening isn’t necessarily a good guide.

“It’s going to be an incredibly tough market, so you need to figure out which companies will be able to pass price increases on to their customers.”

Hall added that consumer stocks are likely to find the coming months the hardest as demand falls as the cost-of-living crisis hits and people hold back on unnecessary purchases.

He said: “For example, look at some of the food and commodity products that are going up in price.

“Palm oil has doubled in price and palm oil is going into shampoo and soap. It’s not just food – barley is going into beer and beer prices are going to soar.

“This will affect a broad range of product categories and not just a narrow area.”

In contrast, Peel Hunt is “relatively bullish on the housing market,” Hall said, and the firm has highlighted several homebuilders and building materials companies as a result.

Hall added: “Under normal circumstances, one would expect rising interest rates to pose major challenges for the housing market, particularly as construction costs rise.

“You could have the problem of a deteriorating demand side at the same time as a deteriorating margin.

“But the demand for housing is so great and I don’t think it’s going to go away anytime soon.

“We have a shortage of housing in the UK and demand and the desire to own property appear to be increasing, not declining.

“Home builders are pretty well positioned to pass on these price increases, and it’s not going to significantly erode home affordability.”

Of the 13 economic subsectors, 11 contributed positively to the increase in the annual rate in February

Of the 13 economic subsectors, 11 contributed positively to the increase in the annual rate in February

Some of Peel Hunt’s best inflation stocks

Premier Foods is well positioned to handle the current environment. Premier has pricing power through its brand focus, has the leading market position in all of its categories and has a track record of managing inflation.

The company is less exposed to labor supply problems than other companies in the industry because its manufacturing operations are highly automated and the company has relatively few employees near minimum wage.

games workshop has relatively little exposure to higher costs due to its high gross margin and ability to increase prices (up 5 percent from March). The main cost increase over the past year has been freight, which has stabilized over the past few months. On the demand side, hobbies tend to be resilient during times of stress, as observed during the global financial crisis (GFC).

We would also like to highlight a number of money managers who will benefit from rising interest rates: Hargreaves Lansdown, Curtis Banks, rat bone and Brooks McDonald, for example. In any case, the cost associated with improving interest income tends to be small and the marginal profit collapse is consequently significant.

CV – The veterinary industry tends to be very resilient in times of pressure on consumer budgets [roughly] 40 percent of expenses are emergency-based and pet owners tend to prioritize their pet’s health. Given the relatively low spend per customer and limited desire to shop around, the industry has good pricing power.

During the GFC, CVS had a brief period of weaker sales, which was understandable given the level of concern about job security and budgetary finance. Given the importance of pets, we do not expect a period of budget tightening to impact demand. If it continued for a long period of time, the desire to replace a pet or add a pet would decrease. We currently see upside potential in our forecasts.

Travis Perkins and Grafton Group typically last about two months, which, all other things being equal, translates to an additional 200 basis points at a typical gross margin of 30 percent. So far, higher prices for RMI products have not impacted demand, as post-Covid-19 consumers have typically made significant savings and RMI projects (especially large ones) are targeted at higher-income older households, not just during Covid have accumulated more savings but also have higher levels of home equity and lower levels of debt after experiencing consecutive house price booms over the past three decades.

In terms of platforms, both right movement and car dealer Provide pricing clarity for a market by scope of coverage. And in the case of Auto Trader, some very important tools and services for retailers and consumers to help assess the price position of a particular vehicle.

Certainly, the full market surveillance inherent in Auto Trader’s service allows the retailer to shop with confidence and price with insight, and also the consumer to independently assess whether a vehicle is cheap or expensive in a current market context.

JD Sports – History teaches us that sports fashion is resilient to economic fluctuations (especially when it comes to shoes) and we see no reason why this “shock” occurs; should be somehow different. There are many other monthly expenses that go before sacrificing the regular pair of new sneakers.

In fact, JD’s lead buyer may be doing relatively better over the next six months or so (minimum wage goes up, but Mom and Dad pay the utility and grocery bills), so we have little concern about inflation in either footwear or apparel doing so will have a significant impact on JD’s sales.

Okado has already addressed the concerns surrounding food prices, which will impact its short-term profitability, in its most recent trade statement. However, this makes the need to digitally transform the food industry even more important. The investment thesis for the Ocado Group is not Ocado.com. With food costs and wage increases out of their control, supermarkets around the world should not incur additional costs (e.g. in-store pickup and delivery) to satisfy consumer desire for their already tight profit margins.

You should look into Ocado’s centralized fulfillment solution. It is profitable and yielding for the customer and even has the potential to help the customer expand their reach (e.g. Kroger in the US). In addition, Ocado’s model is a mid-single-digit commission on gross merchandise value (ie, groceries sold). So when food prices go up, Ocado’s revenue goes up, too.

Some links in this article may be affiliate links. If you click on this, we may earn a small commission. This helps us fund This Is Money and keep it free to use. We do not write articles to promote products. We do not allow a business relationship to compromise our editorial independence.

UK equities to protect your portfolio from rising inflation

Source link UK equities to protect your portfolio from rising inflation

Back to top button