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How inflation can hide stockmarket opportunities

Inflationary periods can be a good time to identify mis-priced stocks if you know what to look for, says Pendal’s CLIVE BEAGLES

  • Inflation triggers mis-pricing of stocks
  • Important to decipher inflation and volume in revenue growth
  • Cyclical stocks oversold in UK market

HOW can equity investors identify mis-pricing in an inflationary environment — and therefore identify opportunities?

Pay attention to the difference between real growth and nominal growth rates of a company, says Clive Beagles, senior fund manager at Pendal’s UK-based asset manager J O Hambro. 

Real growth measures growth adjusted for inflation. Nominal growth doesn’t adjust for price changes.

“Inflation has meant real growth forecasts have come down somewhat. But companies operate in a nominal growth rate world, and they’re still going to be high,” says Beagles.

“In the UK nominal growth could be 10 per cent — and that hasn’t happened since the 1980s.

“It’s a very different environment and people haven’t been focusing on it. Earnings could prove to be much better than people think because they are in nominal terms.”

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In all markets it’s important to look at individual companies and decipher the split of revenue growth between inflation and volume, says Beagles.

“Some companies are very helpful at providing it and some aren’t.

“If you can understand the split, you can identify companies that can pass through price rises, and those that might end up with strong revenue growth but no volume growth,” he says.

Rotation away from cyclicals and financials ‘overdone’

In the UK, the rotation away from financials and cyclicals towards defensive stocks is overdone,  argues Beagles.

Extreme risk aversion in the market means the valuation between defensives and cyclicals is now at the same low level as after 9/11 and during the Lehman collapse in the global financial crisis.

“That’s pretty staggering. We are in this phony period where everyone is anticipating that life slows down quite dramatically but companies haven’t seen it yet.”

The cost-of-living crisis particularly around energy prices in the UK has gotten a huge amount of attention.

“But the stock of savings is elevated and at an aggregate level that will provide a bit of a cushion.” (Though the savings aren’t distributed evenly across society, he adds.)

“The investment community has been whipped up into very bearish sentiment, but the UK is different to Europe. It hasn’t been hit as hard by higher energy prices. It is much more service, consumer-spending oriented. It hasn’t got a big manufacturing sector.

“Share prices are assuming much worse than what we’ve seen so far.

“As risk tolerance normalises, cyclicals and financials should outperform.” 

About Clive Beagles

Clive Beagles is a senior fund manager with Pendal Group’s UK-based asset manager, J O Hambro Capital Management. Clive is one of the UK’s most highly respected equity income managers. He has 32 years of industry experience and co-manages the JOHCM UK Equity Income Fund.

About Pendal Group

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

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This article has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and the information contained within is current as at March 19, 2022. It is not to be published, or otherwise made available to any person other than the party to whom it is provided.

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