Invest to Beat Inflation
As inflation remains above target levels, the purchasing power of our money is slowly declining with each passing day. The only way to eliminate this effect is to invest your money somewhere which has a return greater than or equal to the current rate of inflation, but this is much easier said than done.
In this article, we will explain how to invest during inflation, take a look at what qualities the best stocks for inflation possess and highlight 3 stocks for inflation to consider in 2024.
Table of Contents
How to Invest During Inflation
The goal of any investment is to grow wealth over time, but at a time when the global stock market is taking a beating due to uncertainty, caused largely by rising inflation, where should you put your money? Is it possible to invest your way out of inflation?
It is worth noting that, in a healthy economy, inflation is always present as a low and stable inflation rate is desirable for economic growth, with central banks usually targeting a rate around 2%. However, with inflation in the UK hitting 9% in the 12 months preceding April 2022, the question of investing to beat inflation has become more prevalent.
In this article, we will be focusing on the stock market, looking at how to identify stocks to buy with rising inflation.
Characteristics of the Best Stocks for Inflation
So, what are the best stocks for inflation? As many stocks around the world struggled to perform in 2022, it might be a stretch to identify stocks that do well in inflation. However, we can identify characteristics which investors should look for when investing in an inflationary environment.
Now we know what qualities to look for when considering what stocks to buy for inflation, let’s examine 3 specific stocks to consider for investing to beat inflation in 2024.
It is worth pointing out at this stage that investing during inflation is not an exact science. A company’s share price is determined by market participants through levels of demand and supply. During times of uncertainty, it is hard to predict how market participants will behave and, therefore, how prices will react.
Sell-offs can occur seemingly at random, even with high quality stocks, as investors are more nervous and reactionary than normal. However, depending on your investing time horizon, these sell-offs can sometimes provide savvy investors with an opportunity to pick up undervalued stocks.
Berkshire Hathaway
Berkshire Hathaway is a multinational conglomerate holding company which is owned by arguably the greatest investor of all time, Warren Buffett.
Berkshire Hathaway consists of a wide variety of investments overseen by Buffett and his right-hand man, Charlie Munger. Over the years, Berkshire’s investment strategy has stood the test of time, providing enormous value to its shareholders and regularly outperforming the S&P 500.
In fact, between 1965 and 2021, the compounded annual gain of Berkshire Hathaway was 20.1%, almost double the S&P 500’s 10.5% over the same time period.
We highlighted above some of the qualities which investors should look for in the best stocks for inflation, and it just so happens that Buffett’s investing strategy also places importance in investing in companies which satisfy these criteria.
Amongst Berkshire Hathaway’s vast portfolio are significant investments in the shares of Kraft Heinz Company, American Express, Coca-Cola and Chevron. As well as these investments, Berkshire wholly owns a number of companies, including GEICO – the second largest auto insurance company in the US.
All these companies highlighted, and many others within Berkshire’s portfolio, possess the characteristics of stocks for inflation, making Berkshire Hathaway a stock to consider in 2024 to invest your way out of inflation.
Shell
When investing during inflation, it is worth considering for a moment why inflation is so high at the moment, as not all inflationary periods are created equal.
It so happens that there are many factors pushing inflation higher at the moment. However, one of its key drivers is rising oil and gas prices, which are increasing production costs for businesses and pushing up household energy bills for consumers.
Taking this into consideration, companies operating within the oil and gas industry could prove to be some of the best stocks for inflation in 2022. Rising oil and gas prices have led many companies, such as Shell, to report bumper earnings recently, which in turn has led to surges in share price.
Looking beyond rising prices of oil and gas, Shell possesses all the qualities of the best stocks for inflation.
Although the world is slowly transitioning to greener energy solutions, like it or loathe it, we are still heavily reliant on fossil fuels, and our demand for them is very inelastic. Whilst the current high prices reinforce the necessity of moving away from these environmentally unfriendly energy sources, for the near future at least, you can expect fossil fuels to remain an integral part of our lives.
Our reliance on fossil fuels mean that companies such as Shell can count on predictable income throughout the economic cycle and, as we have witnessed in recent months, these companies have significant power to increase prices without demand suffering considerably.
Mastercard
The last of our stocks to consider for investing to beat inflation is global payment processor Mastercard. Together with its rival Visa, the two companies effectively have a global duopoly on debit and credit card payment processing around the world.
As of May 2022, Mastercard operate in every country in the world, with the exception of Russia, due to the ongoing conflict in Ukraine, and India, due to problems with the country’s regulator.
Mastercard, and other payment processors, have benefitted in recent years from Western society’s gradual transition away from cash and more towards the use of debit and credit cards – a trend which has been accelerated due to the pandemic.
A large part of Mastercard’s revenue is generated by transaction fees. Every time a consumer, or a business, pays for something with a debit or credit card that uses the Mastercard payment network, Mastercard charges a percentage of the transaction.
In other words, the higher the value of the payment, the higher the fee that Mastercard receives for processing said payment. Inflation makes the price of everything we buy rise, meaning that Mastercard transaction fees rise in lockstep with inflation.
Many investors gravitate towards Mastercard over their main competitor Visa because the former is a slightly smaller company, meaning that, in theory, it has more room for future growth. However, other than that, there is not much to separate the two companies, and both could be stocks that do well in inflationary times.
Nevertheless, it is not all positives for Mastercard. Although the company’s transaction fees may benefit from higher prices, a prolonged period of inflation and, in the worst-case scenario, a recession, would likely lead to a fall in consumer spending, which would negatively affect Mastercard’s earnings potential.
Final Thoughts
You should now be more familiar with what to look for when investing to beat inflation and the qualities which the best stocks for inflation possess. We have also provided a few examples of stocks to consider in order to invest your way out of inflation in 2024.
As inflation remains high, it is important to bear in mind that short-term volatility in the stock market is to be expected. Therefore, it is essential that you only invest capital which you do not need in the short-term. Before investing, always ensure that you have an emergency fund of cash to fall back on.
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