Which shares will survive inflation hit?

Firms forced to raise prices could lose customers and cut profits. But some have 'pricing power'. Simon Read reports

Inflation slipped slightly last month but, with soaring energy prices, is almost certainly going to climb in the coming months.

Will it top 5 per cent? The Bank of England thinks so.

The minutes of the Bank's Monetary Policy Committee meeting earlier this month revealed: "Despite the fall in CPI inflation in June, it was likely that inflation would rise further, to over 5 per cent, in the coming months."

The fears are that rising gas and electricity prices – with three of the big six firms already announcing hikes of around 18 per cent in the next two months – will quickly push inflation to a 20 year high of 5.5 per cent or more.

High inflation has already had its effect on consumers. The latest Nationwide Consumer Confidence Index published on Thursday made for grim reading. The Index stands 11 points lower than at the same time last year and 28 points below its long-run average. With confidence about the economy low, people are cutting back.

For investors, inflation can offer opportunities. For instance, Mick Gilligan at stockbroker Killik tips agribusiness Syngenta as well-placed to benefit from rising food prices. The company uses biotechnology and genomic research to increase crop productivity.

"With strong exposure to the theme of growing food needs and a larger emerging markets middle class, Syngenta is a buy," he says.

In the UK, with food bills climbing, supermarkets could clearly profit. But loyalty may go out of the window as household budgets are tightened and shoppers seek keener prices. For that reason, the more heavily discounted chains – such as Lidl, Aldo and, in the clothes sector, Primark – may see an upsurge in demand as inflation bites even harder.

Retailers that are forced to cut prices to attract customers could soon start to struggle. For instance Kingfisher, the parent company of B&Q, is highlighted by the Share Centre as one to watch.

"Offers to entice consumers could put a strain on margins," says Nick Raynor, investment adviser at the Share Centre. "The company's update at the beginning of June did note tougher times ahead."

So which companies will withstand the problems of rising inflation? Those that sell items where demand is price inelastic. That means that, even if they increase prices, demand shouldn't fall.

A great example of that is Burberry. It has diversified from raincoats and checked scarves to become a leading and resilient global luxury goods brand, with a strong presence in the quickly-growing market of China.

"Burberry's strong and highly sought-after brand enables it to effectively pass on the impact of rising input costs to its customers via higher prices," says Aruna Karunathilake, manager of Fidelity UK Aggressive fund.

She also picks energy exploration and production company BG Group. "Commodity companies such as BG tend to do well in times of rising inflation, as their real assets keep their value in times of monetary debasement," she says.

Sam Morse, manager of the Fidelity European fund says Nestlé is a great example of a company with significant pricing power.

"It has been successful in creating a collection of brands that consumers like, such as KitKat, Shredded Wheat and Nescafé," he points out. In addition, he says, Nestlé benefits from significant scale advantages to be a low-cost producer.

Tobacco company Swedish Match is another good example, Morse says. The firm manufactures and markets products such as snus/snuff, chewing tobacco, cigars, pipe tobacco, matches and disposable lighters. "Naturally, demand for such products that are associated with an addiction tend to be rather price inelastic," Morse says.

Amit Lodha, portfolio manager, Fidelity Funds Global Real Assets fund, picks engineering company Linde and Australian mining company Iluka Resources. "Linde has pricing power as it has the ability to pass through higher costs through its contracts that it sets with its customers at different stages of the cycle," she says. Iluka, she adds, has leeway to raise prices of the zircon and titanium it mines.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Sales Executive / Foreign Exchange Dealer - OTE £40,000+

    £16000 - £40000 per annum: Recruitment Genius: A Foreign Exchange Dealer is re...

    SThree: Experienced Recruitment Consultant

    £20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...

    Recruitment Genius: Collections Agent

    £14000 - £16000 per annum: Recruitment Genius: This company was established in...

    Day In a Page

    The long walk west: they fled war in Syria, only to get held up in Hungary – now hundreds of refugees have set off on foot for Austria

    They fled war in Syria...

    ...only to get stuck and sidetracked in Hungary
    From The Prisoner to Mad Men, elaborate title sequences are one of the keys to a great TV series

    Title sequences: From The Prisoner to Mad Men

    Elaborate title sequences are one of the keys to a great TV series. But why does the art form have such a chequered history?
    Giorgio Armani Beauty's fabric-inspired foundations: Get back to basics this autumn

    Giorgio Armani Beauty's foundations

    Sumptuous fabrics meet luscious cosmetics for this elegant look
    From stowaways to Operation Stack: Life in a transcontinental lorry cab

    Life from the inside of a trucker's cab

    From stowaways to Operation Stack, it's a challenging time to be a trucker heading to and from the Continent
    Kelis interview: The songwriter and sauce-maker on cooking for Pharrell and crying over potatoes

    Kelis interview

    The singer and sauce-maker on cooking for Pharrell
    Refugee crisis: David Cameron lowered the flag for the dead king of Saudi Arabia - will he do the same honour for little Aylan Kurdi?

    Cameron lowered the flag for the dead king of Saudi Arabia...

    But will he do the same honour for little Aylan Kurdi, asks Robert Fisk
    Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

    Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

    Humanity must be at the heart of politics, says Jeremy Corbyn
    Joe Biden's 'tease tour': Could the US Vice-President be testing the water for a presidential run?

    Joe Biden's 'tease tour'

    Could the US Vice-President be testing the water for a presidential run?
    Britain's 24-hour culture: With the 'leisured society' a distant dream we're working longer and less regular hours than ever

    Britain's 24-hour culture

    With the 'leisured society' a distant dream we're working longer and less regular hours than ever
    Diplomacy board game: Treachery is the way to win - which makes it just like the real thing

    The addictive nature of Diplomacy

    Bullying, betrayal, aggression – it may be just a board game, but the family that plays Diplomacy may never look at each other in the same way again
    Lady Chatterley's Lover: Racy underwear for fans of DH Lawrence's equally racy tome

    Fashion: Ooh, Lady Chatterley!

    Take inspiration from DH Lawrence's racy tome with equally racy underwear
    8 best children's clocks

    Tick-tock: 8 best children's clocks

    Whether you’re teaching them to tell the time or putting the finishing touches to a nursery, there’s a ticker for that
    Charlie Austin: Queens Park Rangers striker says ‘If the move is not right, I’m not going’

    Charlie Austin: ‘If the move is not right, I’m not going’

    After hitting 18 goals in the Premier League last season, the QPR striker was the great non-deal of transfer deadline day. But he says he'd preferred another shot at promotion
    Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

    How Isis profits from destruction of antiquities

    Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
    Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

    'If we lose touch we’ll end up with two decades of the Tories'

    In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea