Stocks to play Inflation on the rise: travelers, Exxon, US bank
IInflation has had an upward trend, driven by the expansionary monetary policy of central banks, pent-up demand for commodities following the Coivd-19 lockdowns, measures taken by companies to replenish or build up stocks, and also because of significant constraints on the supply side. Now inflation appears to be here to stay, with the 10-year breakeven inflation rate reflecting expected inflation rates over the next ten years, standing at around 2.4%, close to highest levels since 2013.
So how should equity investors play in the current inflationary environment? Our theme on Stocks will work against rising inflation includes stocks that could remain stable or potentially benefit from higher inflation rates. The theme has outperformed, with a return of around 18% year-to-date, versus a return of around 12% on the S&P 500. However, it has underperformed since late 2019, with a return of around 1% since compared to 30% for S&P 500. The theme is mainly composed of stocks in the banking, insurance, consumer staples and energy sectors, which should benefit from higher inflation long-term. We have excluded sectors such as metals, building materials and semiconductor manufacturing which performed extremely well on the initial reopening but appear to be on the verge of peaking. Here’s a bit more about the stocks and sectors in our theme.
Bank shares: Banks make money through the net interest spread, which is basically the difference between the interest rates on deposits and the interest rates the bank receives on the loans it makes. Now, higher inflation usually leads to higher interest rates, which in turn can help banks increase their net interest income and profits. Separately, banks are also expected to benefit from increased consumer credit card spending. Banks in our theme include Citigroup (C) and US Bank (USB): – which have higher exposure to the retail banking space. Citi stock is up 26% year-to-date, while US Bancorp is up 28%.
Insurance actions: Insurance companies typically invest excess underwriting capital to generate interest income. Now, higher inflation, which leads to higher interest rates, can also help increase their profitability. Companies like The Travelers Companies (TRV) and Chubb (CB), which rely more on investment income than their insurance peers, stand to benefit. The traveler stock is up about 12% this year, while Chubb is up 8%.
Common consumer products: Consumer stocks should also hold up well in the face of rising inflation. The demand for these companies remains stable as they deal with essential products, and these companies can also pass higher costs on to customers. Our theme includes tobacco giant Altria Group, (MO) which is up 21% this year, food and beverage major PepsiCo (PEP) which is roughly stable, and consumer products player Procter & Gamble (PG), which is down about 1%.
Oil and gas: Energy stocks have a good track record of performance during periods of rising consumer prices. While expanding economies should bode well for oil demand and prices, the big oil companies also have high operating leverage that helps them generate higher profits as revenues rise. Choices in our theme include the Exxon Mobil (XOM) Oil and Gas Barometer, which has gained 43% this year, and Chevron (CVX), which is up about 23%.
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