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Investing in inflation: the companies winning from higher prices

Rising inflation and supply chain disruption are a key AGM theme this year. But ASX investors can find opportunity if they know where to look. Pendal equities analyst ANTHONY MORAN explains

  • Inflation pressures the talk of AGM season
  • Opportunity for some to rebuild margins
  • “Classic early cycle” 

RISING INFLATION could deliver improved earnings for companies agile enough to rebuild margins and capacity in the face of higher costs, says Pendal equities analyst Anthony Moran.

Supply chain constraints, rising input and energy costs and scarce labour are driving inflation higher. US consumer prices are up 6.2 per cent year-on-year to October and Australian inflation is up 3 per cent in the year to September.

But beneath the scare stories on the news, this year’s Annual General Meeting season suggests that a bout of inflation could turn out to be a benefit for some ASX companies.

“We’ve all seen the headlines around inflation and supply chain issues and there has been a bit of anxiety around that,” says Moran.

“But through AGM season we are now starting to get a real read on how inflation is affecting companies.

“What’s interesting is that companies with pricing power can pass through this cost inflation — and for some, it’s even got to the point where they are getting a little margin expansion.

“Some companies are seeing this as an opportunity.”

Several themes are converging to create favourable outcomes for certain companies, Moran says.

For a start, the very fact that inflation is headline news is conditioning consumers for higher costs, which creates a favourable environment for companies to push through price rises.

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But perhaps more importantly, consumer demand remains strong.

Household budgets are in good order. Government stimulus payments have allowed people to top up savings, rising house prices are lifting home equity and low interest rates are releasing disposable income.

Demand is particularly strong for construction materials like siding, bricks and plasterboard.

And amid the strong demand, supply constraints are hampering the ability of overseas companies to compete, allowing domestic manufacturers to regain market share while pushing through price rises.

Classic early cycle

“This is the classic early stage of the economic cycle where inflation isn’t a negative yet,” Moran says.

ASX investors should look at large companies with pricing power and domestic manufacturing capability. He nominates US-based home siding maker James Hardie and bricks and plasterboard maker CSR as examples of companies winning in the current cycle.

But watch out for companies that cannot pass on price rises. Moran points to Dominos as an example of a company finding it hard to lift prices when its marketing relies on the promise of cheap pizza.

“There will be losers from all this but at this stage we’re actually finding more winners than losers,” he says.

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The rebuilding of capacity and pricing power also gives some clues to how the debate over whether inflation is transitory or here to stay will play out, says Moran.

“We are wearing sky high inflation and freight costs in all these industries — timber is up 50 per cent, steel is up similar.

“But the response from companies to this is to build more capacity.

“And as new capacity is added, prices for all of these commodities will come off again so you will get a steady deflationary pulse.”

Supply chain outlook

Investors should watch US immigration trends for clues on how the supply chain constraints will resolve, Moran says.

“The real silver bullet for many of these issues like freight will be international migration of workers resuming.

“The fundamental issue with freight is a lack of truck drivers. To get more drivers you need higher wages and you need more migration.”

As always, investors need to consider the risks.

As inflationary pressures unwind and commodity prices fall, companies that had been benefitting from higher prices will come under pressure. And as freight normalises, imports will become competitive again.

“These things that have been positive drivers may reverse,” says Moran.

The other risk is that inflation begins to crimp demand.

“If we see a demand slowdown but inflation persisting, then pricing power may evaporate and you actually end up in the worst of both worlds with rising costs and lower revenues.

“You’ve got to watch that cycle like a hawk.

“The good news is that it appears that global policymakers are solving for slightly higher inflation and slightly higher demand for longer to help the global economy recover from COVID disruptions.”


About Anthony Moran and Pendal Focus Australian Share Fund

Anthony Moran is an Australian equities investment analyst with more than 15 years of experience in a range of local and international sectors. His sector coverage includes Australian Industrials and Energy, including Building Materials, Capital Goods, Engineering & Construction, Transport, Telcos, REITs, Utilities and Infrastructure. Anthony is a CFA Charterholder and holds bachelor degrees in Commerce and Law from the University of Sydney.

Pendal Focus Australian Share Fund is Crispin Murray’s flagship Aussie equities strategy. It is a high-conviction equity fund with a 16-year track record of strong performance in a range of market conditions. The Fund features our highest conviction ideas and drives alpha from stock insight over style or thematic exposures.

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

Find out more about Pendal Focus Australian Share Fund here

Contact a Pendal key account manager here


This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at November 17, 2021.

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