Shares to protect against persistently high inflation

Investors can follow winning strategies and prospering companies even when shop prices are rocketing. Katie Binns outlines sensible strategies for inflationary times.

The cost of living crisis is on everyone’s mind. Inflation in the UK is at a 30-year high. People are noticing that the rise in food costs is not just a few pence here and there, it’s significant money. Even scarier energy bills are on the way. 

Despite this, Capital Economics is optimistic. “We predict GDP will grow by 4% this year, which is a bit less than most forecasts, and we expect inflation to outpace nominal wage growth but we don’t think the fall in real wages will be a disaster for growth. Why? First, we expect employment growth to be fairly robust, and second some households have accumulated savings.”

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Victoria Scholar, head of investments at interactive investor, also describes the economic outlook as upbeat because of “…strong demand as we emerge from the pandemic”. But she has concerns, too. “Inflation is the biggest threat to this outlook, and also the rising interest rates that go with it. Financial stocks tend to benefit from a rising rate environment by providing a tailwind to net interest margins.”

There’s no doubt that 2022 will see all-out efforts to fight the cost of living crisis - even by higher earners who will be able to absorb rising costs. While some sectors are expected to enjoy healthy pay rises that could more than offset this, it certainly won’t occur across the board. Households - even affluent ones - having to tighten their belts will invariably start by trimming back on luxuries, potentially dampening prospects for companies at that end of the market.

As ever, it’s hard to predict the extent to which this might affect companies and markets, but focusing on companies that supply the everyday staples we all tend to consume might be the safer option.

Scholar agrees. “For investors, first it is about looking for companies that sell price-inelastic goods, where demand remains strong in the face of rising inflation. Second, services look more attractive than goods as pandemic restrictions are lifted, and international travel reopens.”

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Lord Lee of Trafford, the first ISA millionaire and one of Britain's most successful DIY investors, emphasises that the world always makes it through its difficulties. “If inflation worsens - or if the situation in Ukraine or Taiwan worsens - there will still be opportunities for investors. The key is to not panic into selling and to invest in companies that are in good shape and have not over-borrowed.”

What are the potential winners for investors this year? 

“In retail, the ones at the bottom should benefit. If people are trying to save money they may start spending ‘down’ at retailers like Primark or B&M (LSE:BME) - so retail owners such as Associated British Foods (LSE:ABF) [which owns Primark] could be the winners this year,” says Lee. “Top end brands always do well, while middle-range retail may suffer.”

Other sectors that are interesting for investors in 2022 may seem more obvious. “Travel will do well - people are desperate and unlikely to forsake their holidays even if it requires borrowed money. And healthcare is a continuing growth area - that is unquestionable,” says Lee.

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Meanwhile, some investors may assume that now that restrictions have lifted, home entertainment companies may suffer because we’ll all be going out. Not so, thinks Lord Lee.

“There will be significant growth in the content creation market for streaming companies because there’s huge investment in new TV and film studios happening in Hertfordshire: Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN)are expanding in the UK, while SKY is building a 28-acre complex at Elstree.”

Which companies benefit from that? “Maybe Vitec (LSE:VTC), a supplier of production kit and software, which is headquartered in Richmond. It’s a global leader in what it does and is terrifically well placed to supply accessories for cameras and photo shoots - it’s attractive and undervalued. Facilities by ADF (LSE:ADF) is another interesting company that provides vehicle hire for the television and film industry.”

What investors need to do in 2022:

1. Stick to the golden rule of sitting tight. If your horizon is more than five years, don’t panic and dump your investments. There’s a very good chance that any falls this year will just be a blip in your portfolio’s history. 

2. Review your goals. Take time out to re-establish what you are trying to achieve with your investments and what actions, if any, could help you achieve those goals. Could you be paying less in fees? Do you have holdings in fossil fuels that concern you?

3. Diversify. Another golden rule of investing that ensures you don’t have a portfolio consisting entirely of airline shares (will-they-won’t-they have a good year?). Consider a mix of funds, shares and asset classes. You might prefer a multi-asset fund that does the diversification for you.

4. Consider incorporating some ‘capital preservation’. Some less high-flying assets are still worth considering because they are good at ‘capital preservation’. These assets include gold, seen as a safe-haven investment that normally holds its value, or increases, when other investments fall. “Gold is also considered to be a hedge against inflation,” says Scholar. “Rising price levels in the UK and overseas have the potential to underpin an uptrend for gold.” Government bonds (or gilts) and absolute return funds also aim to deliver positive returns in any market condition using techniques like short selling, derivatives and leverage.