Why a High-Inflation Environment is a Positive Growth Driver for Certain Sectors
With economies around the world reeling under the impact of high inflation, investors would do well to invest in sectors that benefit from elevated prices and make the best use of this tumultuous period
Be it emerging markets like India or developed nations like the UK; consumer and wholesale price indices are hovering around multi-year highs and threatening to derail economic activity due to their adverse impact on household consumption. However, for retail investors on the lookout for investment opportunities in the current environment, a few sectors stand out for their steely resilience and the positive growth potential on offer. Among those sectors that revel in such an inflationary environment, let us look at the best industries that are worth investing in, both as a hedge against inflation and to generate positive returns.
Real Estate
The real estate sector offers the dual benefit of property price appreciation and the potential to generate higher rental incomes when inflation remains persistently high. As long as interest rates do not rise so high as to impact consumer demand, real estate companies should do well in the current market cycle and it makes sense to invest in reputed names in the business. Alternatively, investors could invest in a real estate investment trust (REIT) publicly traded on the Indian stock exchanges.
Energy
Barring a few periods where business activity has fallen, like during the first lockdown announced to combat the spread of the Coronavirus, the energy sector remains one of the few sectors to witness consistent consumer demand. Additionally, companies in this space are able to price their products in step with higher inflation rates, thereby generating higher profits and better returns on investment. Investors would do well to choose companies that are market leaders in their segment or those with high operating leverage to benefit from during periods of high inflation.
Banking and Financial Institutions
Leaving aside the 2008 global financial crisis that rocked the financial world, banks and non-banking finance companies (NBFCs) offer great investment opportunities, especially those that are trading at a discount to their book value. This is because high inflation is usually followed by central banks raising interest rates, which is ultimately passed on to the consumer. As a result, as long as the economy keeps growing and robust underwriting standards are followed, financial institutions should be able to capitalize on higher net interest margins (NIMs) and generate higher returns for their stakeholders.
FMCG companies
Although the consumer staples sector is the first to feel the impact of rising commodity and food prices, FMCG companies with a large retail footprint are able to price in higher input costs and leverage operational efficiencies to provide a stable earnings growth rate. Moreover, these companies are considered to be value stocks that provide good dividend yields and act as a good hedge for your equity portfolio against rising inflation.
Healthcare
One of the most critical sectors in an economy that aims to mature from an emerging market status, the healthcare sector is rarely impacted by high or low inflation. Firms operating in this space are instead driven by the advancements they make in terms of medical science, technology, or network expansion, with investors preferring to invest in players that have a pan-India presence. Considering that the healthcare sector always grows faster than the nation’s economy, it makes prudent sense to invest in this sector for the long term.
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With economies around the world reeling under the impact of high inflation, investors would do well to invest in sectors that benefit from elevated prices and make the best use of this tumultuous period
Be it emerging markets like India or developed nations like the UK; consumer and wholesale price indices are hovering around multi-year highs and threatening to derail economic activity due to their adverse impact on household consumption. However, for retail investors on the lookout for investment opportunities in the current environment, a few sectors stand out for their steely resilience and the positive growth potential on offer. Among those sectors that revel in such an inflationary environment, let us look at the best industries that are worth investing in, both as a hedge against inflation and to generate positive returns.
Real Estate
The real estate sector offers the dual benefit of property price appreciation and the potential to generate higher rental incomes when inflation remains persistently high. As long as interest rates do not rise so high as to impact consumer demand, real estate companies should do well in the current market cycle and it makes sense to invest in reputed names in the business. Alternatively, investors could invest in a real estate investment trust (REIT) publicly traded on the Indian stock exchanges.
Energy
Barring a few periods where business activity has fallen, like during the first lockdown announced to combat the spread of the Coronavirus, the energy sector remains one of the few sectors to witness consistent consumer demand. Additionally, companies in this space are able to price their products in step with higher inflation rates, thereby generating higher profits and better returns on investment. Investors would do well to choose companies that are market leaders in their segment or those with high operating leverage to benefit from during periods of high inflation.
Banking and Financial Institutions
Leaving aside the 2008 global financial crisis that rocked the financial world, banks and non-banking finance companies (NBFCs) offer great investment opportunities, especially those that are trading at a discount to their book value. This is because high inflation is usually followed by central banks raising interest rates, which is ultimately passed on to the consumer. As a result, as long as the economy keeps growing and robust underwriting standards are followed, financial institutions should be able to capitalize on higher net interest margins (NIMs) and generate higher returns for their stakeholders.
FMCG companies
Although the consumer staples sector is the first to feel the impact of rising commodity and food prices, FMCG companies with a large retail footprint are able to price in higher input costs and leverage operational efficiencies to provide a stable earnings growth rate. Moreover, these companies are considered to be value stocks that provide good dividend yields and act as a good hedge for your equity portfolio against rising inflation.
Healthcare
One of the most critical sectors in an economy that aims to mature from an emerging market status, the healthcare sector is rarely impacted by high or low inflation. Firms operating in this space are instead driven by the advancements they make in terms of medical science, technology, or network expansion, with investors preferring to invest in players that have a pan-India presence. Considering that the healthcare sector always grows faster than the nation’s economy, it makes prudent sense to invest in this sector for the long term.