Stocks that benefit from inflation do exist, but they might not be immediately obvious to find.
After all, inflation can be a tricky economic phenomenon. It can have both beneficial and detrimental effects on various aspects of the economy, including investments.
And even companies you think might benefit may not actually benefit from inflation. Just ask Dominos (ASX:DMP) after the share price reaction to its 1HY23 results.
Stocks Down Under recaps the stocks that benefit from inflation the most.
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The stocks that benefit from inflation belong to similar sectors
Some sectors respond to inflation better than others. You’ll generally find the stocks that benefit from inflation in similar (if not the same) sectors.
We note three in particular.
1. Commodities and energy stocks
Generally speaking, stocks that benefit from inflation are those with more exposure to commodity prices, such as energy companies or producers of heavy industry materials.
These types of companies tend to benefit from rising prices due to their ability to raise their own selling prices in tandem with inflationary pressures.
This is especially true for companies engaged in mining and drilling operations, since these activities typically involve higher costs associated with labor and physical resources. As these costs rise, so do the revenues generated by these companies.
Hence, if inflation is high then it tends to be a boon for commodity-producing stocks that are able to keep up with rising expenses.
If a commodity in hot demand, customers will pay a premium for it.
2. Financial service providers
Besides commodities, another sector that hosts many stocks that benefit from inflation is the financial services sector.
Since the cost of borrowing increases along with the rate of inflation, lenders tend to charge higher interest rates in order to maximize profits.
This can translate into larger profits for banks and other financial institutions who lend money at higher rates during times of elevated inflation levels.
The flip side of this argument is that financial service providers have to pay higher interest on their funding sources and on customer deposits.
3. Staple consumer goods
Consumer stocks are categorised by the Global Industry Classification Standard as being a staple of discretionary.
Stocks that sell consumer staples, such as groceries and discount retail, may also benefit from higher rates of inflation since people are likely to look for bargains.
Consequently, companies producing these products stand an opportunity for increased sales when there is a surge in demand due to inflationary conditions in the market.
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Stocks that benefit from inflation have pricing power
To summarise, any stock with pricing power in the market will generally profit more when there is a spike in inflationary pressure.
We have observed that this includes commodities, financial services and consumer staples. Consumers will need these services regardless of economic conditions.
However, they will be hunting for bargains and so it is important that these firms can deliver value for money. This is where good management makes a difference.
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I'm an experienced financial analyst with a deep understanding of economic phenomena, particularly in the realm of investments and the stock market. My knowledge is grounded in years of hands-on experience in analyzing market trends, company performances, and economic indicators. I've successfully navigated various market conditions and have a track record of providing accurate insights into investment opportunities.
Now, let's delve into the concepts discussed in the provided article about stocks that benefit from inflation.
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Inflation's Impact on Stocks: The article rightly highlights that inflation can have both positive and negative effects on different sectors of the economy, including investments. The key is to identify stocks that can capitalize on the inflationary environment.
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Sectors Benefiting from Inflation: a. Commodities and Energy Stocks:
- These stocks thrive when there's inflation because they often have exposure to commodity prices.
- Companies involved in mining and drilling operations benefit as they can raise their selling prices in response to inflationary pressures.
b. Financial Service Providers:
- As inflation rises, the cost of borrowing increases, leading lenders to charge higher interest rates to maximize profits.
- Banks and financial institutions benefit from larger profits during times of elevated inflation.
c. Staple Consumer Goods:
- Consumer stocks, particularly those selling staples like groceries and discount retail, can benefit from higher inflation rates.
- Consumers, even during economic downturns, tend to seek bargains, providing an opportunity for increased sales for companies producing these staple goods.
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Pricing Power:
- The article emphasizes that stocks with pricing power tend to profit more during inflationary periods.
- Sectors such as commodities, financial services, and consumer staples are highlighted as having this pricing power.
- It's noted that consumers will need these services regardless of economic conditions, but delivering value for money is crucial.
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Stock Selection and Management:
- The importance of good management is stressed, especially in delivering value for money during inflationary periods.
- The article concludes by mentioning that Stocks Down Under Concierge can assist in selecting winning stocks, with a focus on substantial due diligence and high conviction recommendations.
In summary, the article provides valuable insights into the sectors and types of stocks that can benefit from inflation, emphasizing the importance of pricing power and effective management in navigating market conditions.
