Energy, real estate and consumer-facing brands should be at the top of investors’ portfolios this year as inflation begins to bite, according to an analyst.
Dan Lane, senior analyst at Freetrade, earmarked the best ways to hedge against hastening inflation that has the potential to erode traditional equity and capital markets.
The UK’s consumer prices index (CPI) rose 5.5% in January, the biggest rise in 30 years, as continued supply chain shortages increase the threat of a wage-price spiral.
Lane cites Schroders research showing the energy sector has beaten inflation 71% of the time and delivered annual real return of 9% on average since 1973.
"Commodity producers who can raise prices at source and keep a healthy pipeline of customers can be a good way to maintain margins too. Some of the precious metals miners have got a lift as investors eye up this trade.”
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Real estate is another area that Lane believes could deliver gains, having beaten inflation 67% of the time for an average real return of 4.7%.
Lane pointed to real estate investment trusts (REITs) as net interest margin swells on the back of tightened monetary policy, and commercial real estate as most likely in this group to beat inflation.
“With the rise in ecommerce, a lot of these REITs have shifted to warehousing, giving them good potential for the age of online shopping.”
Examples include SEGRO Plc (LSE:SGRO), LondonMetric Property PLC (LSE:LMP), Tritax Big Box REIT PLC (LSE:BBOX) and Warehouse REIT PLC (AIM:WHR).
In customer-facing companies, the price makers of The Coca-Cola Company (NYSE:KO) and Louis Vuitton Moet Hennessy (EPA:MC) (LVMH) are unlikely to feel much resistance from consumers as they hike prices, passing costs onto buyers.
“These two organisations generally enjoy customer loyalty, which can mean they are able to raise prices without any meaningful drop off in demand," said Lane.
“In the industrial sector they usually exist where a company enjoys a strong market share in an industry characterised by fragmented customer and supplier bases."