U.S. inflation remained high during the month of July, with the consumer price index increasing 5.4% from a year ago, while the basic price index, which excludes the food and energy, increased by 4.3% compared to last year. Although the CPI growth figures were similar to June’s, remaining near the highest levels seen since 2008, core inflation edged down from the 4.5% growth in June. .
Inflation appears to be on the verge of cooling a bit in the future, as supply-side bottlenecks caused by the Covid-19 lockdowns and subsequent reopening are gradually smoothed out. Additionally, the recent surge in Covid-19 infections in the United States, caused by the highly infectious delta variant of the virus, could impact economic activity and prices. That said, inflation could still remain slightly above historical levels. For example, personal savings jumped during the pandemic, and the continued low interest rate environment over the next two years could also translate into higher prices for goods and services.
Our theme on Stocks will work against rising inflation includes companies in the banking, insurance, consumer staples and energy sectors that could remain stable or even potentially benefit from high inflation. The theme is down about 16% year-to-date, compared to the S&P 500 which is up about 17%. Within our theme, Exxon Mobil (XOM) has been the best performer, growing 32% since the start of the year. US Bank (USB) stock has also performed well, rising around 20% this year so far. On the other hand, Procter & Gamble (PG) has been the worst performer, with its stock only increasing by around 3% since the start of the year.
[7/16/2021] How Equity Investors Can Benefit From Soaring U.S. Inflation
U.S. inflation figures for June have accelerated at the fastest rate since 2008, as the economic recovery from the Covid-19 lockdowns continues to accelerate. According to the Labor Department, the consumer price index is up 5.4% from a year ago, while the basic price index, which excludes food and energy, has increased by 4.5% compared to last year. The price increases have been driven by a growing demand for goods and services that has outstripped the ability of businesses to keep pace. While supply-side bottlenecks are expected to be removed in the coming quarters, factors such as significant stimulus funding, a rise in the personal savings rate in the United States and the continued The low interest rate environment over the next two years could mean that inflation is expected to remain at high levels for the foreseeable future.
So how should equity investors play in the current inflationary environment? Our theme on Stocks will work against rising inflation includes companies in the banking, insurance, consumer staples and energy sectors that could remain stable or even potentially benefit from high inflation. The theme is back about 16% year-to-date, roughly in line with the S&P 500. However, it has underperformed since late 2019, remaining roughly stable, relative to the S&P 500 which is up about 35%. Oil and gas company Exxon Mobil (XOM) was the best performer in our theme, rising around 43% year-to-date. On the flip side, Procter & Gamble (PG) underperformed, with its stock remaining roughly flat.
[6/17/2021] Stocks will work against rising inflation
Inflation in the United States is on an upward trend as the abundance of liquidity, surging demand following Covid-19 lockdowns and supply-side constraints put pressure on prices . The Federal Reserve significantly raised its inflation expectations for 2021 on Wednesday, forecasting that the prices of personal consumption expenditure – its preferred measure of inflation – could rise 3.4% this year, a full percentage point ahead of its March projection of 2.4%. The central bank has made no changes to its aggressive bond buying program and has also indicated that interest rates will continue to stay close to 0%, although it has signaled two rate hikes in 2023.
So how should equity investors play with the current inflationary environment and the prospect of higher interest rates? Our theme on Stocks will work against rising inflation includes banking, insurance, consumer staples and energy stocks that could hold steady or even potentially benefit from higher inflation rates. The theme has outperformed, yielding around 17% year-to-date, compared to a return of around 13% on the S&P 500. However, it has underperformed since the end of 2019, remaining low. near stable, compared to the S&P 500 which is up about 31%. Oil and gas company Exxon Mobil (XOM) was the best performer in our theme, rising around 56% year-to-date. On the other hand, Procter & Gamble (PG) has significantly underperformed, with its stock falling around 5% this year.
[5/27/2021] Rising inflation theme
Inflation has followed 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, compared to 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 during 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 such as 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%.
Our theme of Capex Cycle Stocks includes heavy equipment manufacturers, electrical system suppliers, automation solution providers, and semiconductor manufacturing equipment manufacturers who are expected to benefit from increased capital spending by business and government.
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