UK stocks to protect your portfolio from soaring inflation
Games Workshop, Rightmove and Ocado are among the London-listed stocks best placed to protect investors from soaring inflation, according to new research.
Peel Hunt analysts said in a recent research note that there were few historical comparisons to be drawn with Britain’s current “stagflation”, with the country suffering from stuttering growth and inflation potential of more 10% to come.
It is therefore difficult to make a broad appeal to the likely impact on particular sectors, and investors should instead look for companies that can withstand rising costs and weaker demand.
Inflation is putting pressure on margins amid squeezing demand, meaning companies that can successfully pass on price increases will fare better than their peers
“The 5y5y sterling swap rate is a good indicator of changes in longer-term expectations”: The main sectors of the FTSE with the highest positive and negative correlations with the swap rate
The outlook deteriorated last week amid disappointing new data, which showed GDP growth slowing to just 0.1% and CPI inflation beating expectations at 7%.
Peel Hunt research manager Charles Hall said: ‘This is a unique situation so going back in history to see what is happening is not necessarily a good guide.
“It will be an incredibly tough market, so you need to identify companies that will be able to pass price increases on to their customers.”
Hall added that consumer stocks are likely to find the coming months the toughest, with demand expected to fall as the cost of living crisis takes hold and people hold back on unnecessary purchases.
He said: “Look at some of the food items and commodities that are going up in price, for example.
“The price of palm oil has doubled and palm oil is used in the manufacture of shampoos and soaps. It’s not just food – barley is getting into beer and beer prices will go up a lot.
“It’s going to hit a wide range of product categories rather than a narrow space.”
By contrast, Peel Hunt “feels reasonably optimistic about the housing market,” Hall said, and the company has thus highlighted several homebuilders and materials companies.
Hall added: “Under normal circumstances you would expect rising interest rates to be extremely difficult for the housing market, particularly as construction costs rise.
“You might have the problem of deteriorating demand at the same time as 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 an insufficient supply of housing in the UK, and the demand and desire to own your own properties seems to be getting stronger, not weaker.
“Homebuilders are fairly well prepared to be able to pass on these price increases and it will not significantly compromise the affordability of homes.”
Of the 13 economic sub-sectors, 11 contributed positively to the increase in the annual rate in February
Some of Peel Hunt’s top inflation stock picks
first foods is well placed to manage the current environment. Premier has pricing power through its focus on brands, is the market leader in all its categories and has a proven track record of managing inflation.
The company is less prone to labor supply issues 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 low exposure to higher costs given its high gross margin and ability to drive up prices (up 5% from March). The main cost increase over the past year has been freight, which has leveled off in recent months. On the demand side, hobbies tend to be resilient during times of stress, as was observed during the global financial crisis (GFC).
We also highlight a number of wealth managers who will benefit from the rate hike: Hargreaves Lansdown, Curtis Banks, Rathbones and Brooks Macdonald, for example. In either case, there are generally few costs associated with improving interest income, and the loss of marginal profit is, therefore, significant.
SVC – The veterinary industry tends to be very resilient in times of pressure on consumer budgets, as [roughly] 40% of expenses are based on emergencies and pet owners tend to prioritize their pet’s health. The industry has good pricing power given relatively low spend per customer and limited desire to shop.
During the GFC, CVS experienced a brief period of weaker sales, which was understandable given the extent of concerns about job retention and household financing. Given the importance of pets, we wouldn’t expect a period of tight household finance to impact demand. If this lasted for an extended period of time, the desire to replace a pet or add a pet would diminish. Currently, we see upside potential in our forecast.
Travis Perkins and Grafton Group typically hold about two months of inventory, which, all else being equal, translates to an additional 200 basis points on a typical 30% gross margin. So far, rising prices for RMI products have not impacted demand, with consumers generally realizing significant savings post-Covid-19, and RMI projects (especially larger ones) geared towards older and higher-income households, who have not only accumulated more savings during Covid, but also have higher levels of home equity and lower levels of debt after riding through successive surges in the real estate prices over the past three decades.
In terms of platforms, both Move right and Auto trader provide clear pricing to a market through breadth of coverage. And in the case of Auto Trader, in addition, very important tools and services for retailers and consumers that help assess the price position of a particular vehicle.
Certainly, the array of market monitoring that is intrinsic to the Auto Trader service allows the retailer to buy with confidence and price with insight, and also allows the consumer to independently assess whether a vehicle is cheap or expensive in the current market environment.
JD Sports – History tells us that sports fashion resists economic fluctuations (especially in shoes) and we see no reason for this “shock”; should be different. There are plenty of other monthly expenses that go before the regular pair of new trainers are sacrificed.
JD’s main buyer may actually be relatively better off for the next six months or so (minimum wage is going up but mom and dad are paying utility and food bills), so we have little to worry about. as to the inflation of shoes or clothing. have a significant impact on JD’s sales.
ocado has already commented on food price issues in its latest trade statement, which will affect its near-term profitability. However, this makes the need to digitally transform the grocery industry even more important. The investment thesis for Ocado Group is not Ocado.com. With food prices and wage increases beyond their control, supermarkets around the world should not increase additional costs (such as in-store pickup and delivery) to meet consumers’ desire to benefit from their already existing margins. reduced. They should turn to Ocado’s centralized fulfillment solution. It is profitable and cash-generating for the customer and even has the potential to help the customer expand their reach (eg Kroger in the US). Additionally, Ocado’s model is a mid-single digit commission on the gross value of goods (i.e. food sold), so if food prices go up, Ocado’s revenue will also go up.
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