You CAN cash in on inflation: Why top fund Blue Whale is backing firms that can increase their prices – and how to find UK shares that can profit too
- Inflation will likely prove to be the biggest story of the winter for investors
- Latest data – often from the US – is triggering fresh fears of rising costs
- Markets spooked as investors worry central banks might have to raise rates
- Major indices can drop as much as 2% – before slowly recovering
Investors could be forgiven for thinking markets are stuck in Groundhog Day. Over the past few months, the same story has been playing out repeatedly.
First, we see the release of data — often from the U.S. — triggering new fears of rising costs. This then spooks the markets, as investors worry central banks might raise interest rates sooner.
The major share indices usually drop sharply — sometimes by 2 per cent — before slowly recovering their losses.
Spiral: latest inflation data – often from the US – is triggering fresh fears of rising costs, spooking markets as investors worry central banks might have to raise rates
Inflation will likely prove to be the biggest story of the winter for investors. But does it have to be a drag on your portfolio?
One of Britain’s best-known fund managers has revealed he is hoping to profit from inflation.
Stephen Yiu is the manager of Blue Whale Growth Fund: a £1 billion-strong equities fund known for its bets on technology giants. The fund has performed very well over the past five years, turning a £10,000 investment into £18,500.
Mr Yiu is forecasting that rising inflation will force central banks — in the U.S. and UK — to tighten policy. In response, the fund is betting on firms that can increase their prices to compensate for rising costs.
Its largest holding is Microsoft, which makes up almost 8 pc of the fund. The firm is set to increase the price of some of its most popular packages — including Office365 — by up to 25 per cent.
But Mr Yiu predicts that Microsoft’s market dominance means customers will have little choice but to pay the difference.
His fund is also looking to back companies with low external costs relative to income.
The logic is simple: the less money businesses spend on supplies, the less they will be affected by rising costs. It’s why the fund also backs Facebook — or Meta as it’s now known — as well as Visa and Mastercard.
Essentials: Consumer goods titan Unilever has traditionally been held up as the FTSE 100’s biggest inflation shield, owing to its power to pass on costs to consumers
There are options closer to home for those looking to cash in on inflation.
‘You need to ask how rising input costs — including raw materials and labour — will affect a business,’ says Rob Morgan from investment platform Charles Stanley.
‘Companies whose products and services are in strong demand should fare well, as they can raise their prices to reflect costs.’
Consumer goods titan Unilever has traditionally been held up as the FTSE 100’s biggest inflation shield, owing to its power to pass on costs to consumers.
Yet the Anglo-Dutch company hasn’t had an easy ride with pandemic disruption. Its share price is currently 13.62 per cent down since January, and 16.9 per cent short of its pre-Covid price.
But there are other options across the FTSE which fit the golden rules: namely companies with a strong customer base and smaller capital expenditure.
Accounting software firm Sage is one option. As a technology company, its capital costs are low and, like Microsoft, it can pass price rises on to its clients. Its share price is up 34.57 per cent since January.
With its bargaining power over suppliers, Tesco can mitigate the impacts of inflation. Its price has been rising steadily recently — up 23.96 per cent in six months — but remains down (by 13.91 per cent) on its pre-Covid high.
If you do reorder your portfolio, you should keep in mind the fundamentals of investment. Most importantly, don’t get distracted by short-term noise and only invest in firms you think can perform in the long run.