Investors should be prepared for the biggest inflation scare since the 1980s, according to US broker Jefferies, which has looked at which sectors would fare best if the beast really has returned.
Chris Wood, Jefferies’ head of global equity strategy, says the debate now is “how fast and how soon”.
A change in investment regime, from a deflationary era to an inflationary one, could be forthcoming, he adds, with how the Fed and other G7 central banks respond to set the tone.
Jefferies polled its analysts sector-by-sector to gauge how they felt about rising prices.
The broad message was that reopening, rebounds and pricing power should absorb cost inflation, but some companies will find themselves on the wrong side of this trade.
While Jefferies looked largely at large European groups, some UK-listed groups featured.
“We expect the combination of mine supply constraints, less scrap supply and less substitution than many expect, and relatively price-inelastic demand to lead to a tighter market and a higher price.
“Biden’s infrastructure plans also add fuel to the fire as investment in a green economy is copper intensive.”
Food and personal care groups stand out as potential losers, with Unilever PLC (LON:ULVR) and Danone having the most significant challenges, said the broker, though Tate & Lyle (LON:TATE) is an exception and rated a ‘buy’.
In business services, recruiters will benefit from gross margin expansion arising from wage inflation, while distributors Electrocomponents (LON:ELM), Bunzl (LON:BNZL) should benefit from inflationary gains on their inventory.
Construction companies and housebuilders suggest price increases should be sufficient in offsetting rising input costs.
“While input cost inflation may catch up with the price increases seen, we still see upside to consensus (UK Housebuilders, CRH (LON:CRH), said the broker.
In beverages, spirits are most advantageously positioned to navigate rising input costs given high gross margins and mix benefits – key beneficiaries include Diageo (LON:DGE).
Beer already has low expectations on recovery and input cost inflation will likely be outweighed by the impact of recovery post-pandemic.
Insurers among potential losers
Among potential losers, Jefferies points to companies with high debts as they will potentially have to deal with higher interest rates.
Insurers too are vulnerable says the broker. “They take in premiums before they pay claims, so inflation is a key risk.
“Rising repair costs and labour drives higher claims costs, which if not anticipated when claims provisions were set, can lead to reserve strengthening.
“Retail non-life insurers are especially exposed in property, home and motor business.
“Among our coverage, all conglomerates are impacted, including Aviva (LON:AV.).”