Even though the market was obsessed with post-COVID inflation for the first few months of this year, that talk seems to have completely quietened down now.
With the Delta variant of COVID-19 plunging half of Australia into lockdown, the focus is now understandably on yet another recovery out of the pandemic.
But AMP Capital portfolio manager Dermot Ryan reckons rising inflation is still as relevant as ever for investors.
“Many economists seem unconcerned about the potential rise in inflation, often citing the current lockdown-induced slowdown. Some are even talking about a recession,” he wrote on the AMP Capital blog last week.
“We don’t believe we are in a recession. We are in a lockdown.”
He concedes growth might be lost this quarter, but the economic environment is still very “stimulatory”.
Look for ‘price-maker’ ASX shares to thrive in inflation
According to Ryan, in inflationary times like these, the best shares to buy are for businesses that can set their own price.
“We believe that quality companies that have price-making abilities, as opposed to price taking, in an inflationary environment, should be able to increase profit margins,” he said.
“If a company can push up the prices of its goods and services as costs rise, it potentially can increase its margins. We believe these types of companies would be attractive businesses to invest in.”
We already saw an example of this globally last month when US technology giant Microsoft Corporation (NASDAQ: MSFT) raised prices for its ubiquitous Office 365 business subscriptions.
According to CNBC, the rise was the first significant price change since the cloud software launched 10 years ago.
Microsoft could do this without fearing major customer churn because of its dominant market position and how valuable its products have become to its business clients.
“Price-makers are generally companies with strong moats,” he said.
“In infrastructure, regulated returns are sometimes based on a weighted-average cost of capital and they have inbuilt inflation hedges as well. We expect both real estate and infrastructure assets should continue to perform well, as long as inflation expectations don’t get too high as these sectors generally rely [on] a high level of debt.”
Energy infrastructure provider APA Group has seen its shares lose 7.8% this year. Meanwhile, shares for constructions materials maker Brickworks have spiked up more than 22.6% in 2021.
Ryan also liked the pathology area of healthcare as another industry that has price-setting power.
“Pathology players are experiencing increased costs, because there are a lot more collections going on as a result of COVID-19 testing,” he said.
“They are able to pass through higher prices and they operate on very strong margins in our opinion. They are also experiencing operating leverage from increased volumes going through their businesses.”