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Inflation | A Stake Original Series: Part 3

The stocks that perform best in an inflationary economy differ from those which have performed so well over the last few years. Where will the excess returns come from should inflation kick-off? The guide below looks at history’s out-performers in high inflation economies of the past.


One way to beat rising prices at the petrol pump? Own the companies selling your gas. The energy sector comprises oil and natural gas producers, refiners, transporters… the whole supply chain from below ground to service station.

Over the last 6 months, no sector has outperformed the S&P500 Energy Index. While the broader market is up 12% since the start of the year, Energy stocks have powered to a 30% gain. Oil prices are sitting at 2-year highs as OPEC keeps a tight grip on global supply.

Research out of asset managers Schroders found that the energy sector outperformed inflation over a 12 month period 71% of the time since 1973. Moreover, the Producer.

Why energy specifically? Given how reliant economies are on fuel, rises in fuel prices contribute to inflation itself. The Producer Price Index measures the wholesale costs of goods and services in an economy. The US Federal Reserve measures inflation based on PPI. Since 1990, oil prices have had a 71% correlation to price levels.


Mining and materials

The Lithium in your dream Tesla, the cobalt in your iPhone and the palladium in every computer-powered device you own; the mining industry is more than coal and iron ore.

Just like energy, our reliance on raw metals means their price is tightly correlated with inflation. Up over 14% since the start of the year, and outperforming the broader index, the materials sector has proved its worth as inflation expectations increase.

Schroder’s also found that while mining stocks have historically massively outperformed inflation in an inflationary environment, the probability of that happening is low.

Then we have precious metals. Gold was always your grandfather’s best long-term store of value. Is this still the case? While gold was a portfolio-saver during rampant inflation in the 1970s, over the last 50 years, research indicates just a 16% correlation between gold and inflation.


Real Estate

The old brick and mortar investment strategy. Real estate is another sector that can benefit from inflation. Property values tend to increase during expansionary periods as leases and rents follow inflation. Real Estate Investment Trusts are a way to access property through the stock market. A wide range of REITs investing in commercial and residential properties are available on the US market.

Now, it is important to research Equity REITs specifically rather than mortgage REITs. Equity REITs invest in physical property while mortgage REITs hold property debts. Inflation tends to lead to interest rate increases which increase the risk of holding debt.


Slowing Growth

So why have the high growth disruptors started to fall off their all-time highs and steadied out? Stocks like Uber, and Square, even Tesla. Such stocks have so much of their value baked into future cash flows. They aren’t expected to turn a profit today but generate massive revenues in the future. Inflation means such future cash flows are worth less and less which negatively impacts the stock price. $100 is less valuable if prices are expected to rise 10% next year right?

Whether inflation is set to increase or not, it is important to be aware of the wide range of options to maintain your portfolio during any economic circumstances. This article guides your research as you consider new companies to add to your watchlist.

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