As you may have noticed, the market is tense. Since finally crossing the 7000 mark in mid-April, the FTSE 100 has bounced around the 7000 level, climbed to 7130 and then collapsed to 6948. Today, when I write these words, it’s below 7,000 again.
In theory, the market should be more confident than it is now, not less confident. Despite the arrival of new Covid-19 mutants, existing vaccines appear to be proven effective and the economy is slowly resuming.
Here in the UK, you can go back on holidays, visit friends and relatives, and go to local pubs and restaurants. Instead of the chilly marquee built in the garden or car, you can eat and drink while gasping. Park.
Return to price increases
However, the resumption of all this economic activity has the complication of inflation. Simply put, many observers are seeing a surge in prices, including oil, plastics, metals, building materials and commodities, due to expectations for a surge in business activity after a significant restraint in the very early 2020 I came to expect.
In the United States, these expectations are already supported.
Warren Buffett, for example, admits he was kicked out.Many people think of him Berkshire Hathaway (NYSE: BRK.B) Holding investment vehicles and stocks as a fund Coca-Cola, Procter & Gamble, And Kraft Heinz. That’s right — but it also owns almost 100 businesses entirely, which gives Buffett a great insight into US economic activity long before it appears in official statistics.
And in early May, Buffett told Berkshire Hathaway investors at the annual meeting that the US economy was “bright red.”
“We are seeing very big inflation,” the Financial Times reported he said. “It’s very interesting. It’s raising the price. People are raising the price to us and it’s accepted.”
Inflation is not good news for investors.
Fixed income investment, or real inflation-adjusted returns from fixed income and gilts, will fall, pushing down prices and pushing up yields.
Institutional investors respond by increasing the purchase of fixed income investments and reducing the amount of equity investments they hold. As we have seen, selling pushes down stock prices.
Margins can also be squeezed by the inability to raise prices in line with the rising costs experienced by companies, which can directly reduce returns on equity investments.
Household cleaning product manufacturer McBride, For example, we recently warned that full-year profits would be 15% lower than expected in March. Reason? “Rapid, important and sustainable” price increases in raw material costs.
what to do?
The good news is that not all stocks are equally affected by inflation. Therefore, in terms of suffering to portfolios and sources of income, it is possible to avoid some of the worst damages of inflation.
For example, stocks with strong brands have considerable pricing power. Even better are defensive stocks with strong brands. Unilever And Reckitt Ben Kieser, For example, or Diageo.
Real estate and infrastructure also hold up well, especially if rent and returns are related to inflation as a reference point.Take the following real estate investment trust Primary health characteristics, For example, own and rent a doctor’s surgery. Inflation does not do much damage there.
Similarly, utilities can be a safe home because regulators take inflation into account when setting acceptable returns. Retailers with strong brands may also be relatively unaffected by inflation. Pharmaceutical companies as well.
In short, there is no shortage of options. Under the pub, experts may drone on NS & I’s inflation-indexed savings products, but careful stock selection can help stock market investors achieve much better returns. I will. Much, much better return.
Malcolm owns shares in Unilever, Reckitt, and Primary Health Properties. Motley Fool UK recommends Diageo, Primary Health Properties, and Unilever. The views expressed about the companies mentioned in this article are those of the author and may differ from the official recommendations made by subscription services such as Share Advisor, Hidden Winners, and Pro. Here at The Motley Fool, by exploring different insights, Better investors than us.
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