Inflation: Bank of England facing 'tricky dilemma' says Martins
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Inflation is with us now in a way it has not been for several years. The main measure – the Consumer Prices Index (CPI) – soared by 5.1 percent in the year to November, one of the biggest rises in 20 years. And it looks set to continue into 2022, meaning some companies will fare better than others.
Take miners. When prices are on the rise that often feeds into commodity prices, meaning they can sell their goods at a higher price and offset their growing costs.
It makes them attractive if inflation is on the up.
As the prices of essentials like groceries and fuel rise, it leaves less for discretionary businesses to fight over.
Discretionary items are the non-essential but desirable products. They’re the first to go when purse strings tighten.
Branding plays a key role. Firms with strong brands might be able to pass some rising costs on to customers without hurting their volumes.
The most dangerous place is the middle ground – average brands and mid-range pricing. Cheaper options might hang in longer while big brands have loyalty to fall back on.
Interest rates are likely to be another big talking point. Central Banks can use interest rates to control the money supply. Higher rates mean savers get more for their cash, and borrowing becomes more expensive.
That makes us save more and spend less. In December, the Bank of England increased the base interest rate from 0.1 to 0.25 percent. With inflation above 5 percent, and expected to climb before falling later in 2022, more rate rises could be on the cards.
Banks would then be a winner as the cost of loans tend to increase more than deposit rates – banks can use rate rises to make more profit.
On the flip side, high growth businesses have enjoyed low rates. Loans are easy to get and cheap to finance.
That’s great news for newer businesses with lots of growth potential but limited revenues or profits. However, as rates rise those debts become more expensive.
High growth businesses are valued on what they might grow into. When rates are low, investors are happy to fund a more speculative asset. As rates rise, and you can get more for your cash in a safe bank account, those risky high growth businesses aren’t as appealing.
If rates keep rising, we may see speculative growth firms take a hit.
Airlines took a hammering during lockdowns and we’ve already seen some travel bans as Omicron spreads.
They have a large, fixed cost base that still needs to be paid if planes are grounded.
E-commerce would be a winner if we’re stuck inside again – businesses invest in online infrastructure. It’s a trend accelerated by the pandemic.
Companies with good online trade will do better than pure bricks and mortar outlets if things get worse.
With 2022 set to be another eventful year, spread your risk with a diverse portfolio, ignore the short term fads and stick to your investment goals.
And remember it’s a marathon not a sprint.
• Matt Britzman is an Equity Analyst at Hargreaves Lansdown
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