The investor’s ‘dagger’ to kill the stagflation ‘bug’

In the economy, and in the markets, there is a parade of flora and fauna that is used as a metaphor to illustrate different concepts. The inflation monster, the deflation monster, the bulls, the bears, the vultures, the black swans, the gray rhinos… and on and on.

In recent years, investors have had to face the threat of the specter of deflation, which has generated so many headaches in Japan since the beginning of the 21st century. Now the problem is the opposite: inflation is skyrocketing, and with it the fear that it may become entrenched, especially if the central banks do not get down to work to try to get it on track.

And, even worse, with inflation has arisen the possibility of the appearance of a new two-headed monster, the one that combines a sharp rise in inflation with a situation of economic stagnation: stagflation. At the beginning of the year it was a possibility that practically everyone ruled out: the stimulus was large enough to sustain economic growth. Now, however, there are clear signs that the threat of stagflation is real.

the Economist published a survey on March 8 in which 58% of the participants already contemplated the possibility of this scenario materializing. The results of this survey were confirmed last week, with the publication of the latest survey of Bank of America managers, in which, for the first time since the bank began asking respondents about this possibility, it is already a majority the percentage of managers who expect the economy to enter stagflation in the next 12 months. This is expected by 62% of those surveyed.

The central banks themselves are already considering this possibility. The European Central Bank (ECB), for example, showed at its March meeting its concern about the slowdown in economic growth, and also made it clear that it is becoming increasingly clear that the inflationary rebound that is taking place seems to be less transient than expected.

The sectors that will best endure

For many investors, making decisions in an environment of stagflation is entering uncharted territory. Some analysts are already proposing some strategies that can be followed so that the portfolios behave as well as possible in this context.

“Stagflation risks are on the rise. The ECB has just cut its economic growth outlook for this year to 3.7% and raised its inflation forecast to 5.1%. This will be a tough environment.” for some values, but not for the majority”, they explain from eToro.

In their view, most stocks in the market “are in a good position to weather this storm of stagflation”, emphasizing that “many companies have strong brands or market positions and therefore the power of fixing prices to pass on the increase in costs”, they point out. By sectors, they highlight how “this is especially true in health, public services and consumption, such as food, beverages and luxury”, they point out.

Apart from the companies that can pass on the increase in costs to their clients, there are also other sectors that are well positioned in this environment: “Commodity and energy stocks benefit directly from the increase in the prices of basic resources, which is which causes much of these fears of stagflation,” he explains.

What analysts are clear about is that the ability to set prices is one of the most important qualities for a company in an environment of inflation, and also of stagflation. “Companies that have pricing power they can protect their profit margins by passing on costs to their clients”, they agree from Capital Group.

“Among the companies with pricing power we find: companies that offer essential services, such as the giants of the health sector Pfizer and UnitedHealth Group; companies with strong brand recognition, such as Coca Cola; companies belonging to sectors with favorable supply and demand dynamics, such as semiconductor manufacturers TSMC and ASML; and companies such as luxury goods companies, LVMH and Dry“, says Capital Group’s equity manager, Diana Wagner.

These last two firms that Wagner mentions are, in fact, the ones with the best recommendation by the consensus of analysts collected by FactSet, among the firms in the luxury sector that capitalize at least 10,000 million euros.

Using the same criteria, the three most attractive firms in the health sector are the Irish Horizon Terapeuticsthe brazilian hapvida and the Japanese Olympus. As for the consumer staples sector, LG Household, Mondelez and Kerry Groupare the firms with the best recommendation.