11/4/22 10:00 AM - Lesezeit

Equities as inflation protection

Robert Karas

Chief Investment Officer, Partner

Today, compared to last year, I am 30% poorer. Why? Inflation is at 10% and stocks are 20% lower. This is a summary of the accusation against equities as an investment, which has been heard a lot lately.

Okay, maybe the statement is a bit simplified and pointed and yet, it still gets to the heart of the emotion. In fact, profitable investments, even in successful companies, have not worked in the short term and may now unsettle you and many other investors.

Few winners

Unfortunately, success in the stock market is granted to only a few. As with all important things in life, it takes sacrifice to achieve the goal. Due to the competition among market participants, an extreme distribution arises: there are very few, enormous winners and very many who have to reckon with losses or even drop out altogether.

The market is a complex structure of thousands, even several million participants who want to win. This means that investing on the stock market is certainly not, for example, comparable with a savings account where the result is already known at the start (prior to inflation).

The unsuccessful drop out

The markets are like an endless game in which there is no beginning and no end. Rather, unsuccessful players say goodbye over time.[1] This is mainly due to the loss of confidence and a failure to survive a challenging environment.

We, the investors, need a basic thesis, a conviction that we can hold on to in difficult times. My concept during inflation: the equity coupon grows over time. However, if you want to maintain this coupon, you have to survive some tests.

Sir Winston Churchill spoke of blood, toil, tears and sweat in 1940 to prepare his fellow citizens for the hard test of war. You may now be shaking your head at this martial comparison. Yet, in the depths of a bear market - such as during the financial crisis of 2008/2009 - many investors were emotionally close to this parallel.

Five nachos less make the difference

How can the equity coupon grow? The best way to illustrate this is with a concrete example: US beverage and snack manufacturer PepsiCo reported its third quarter 2022 figures in October, with sales volume falling 1% year-on-year. Aha, you might now be thinking, apparently consumers are already more reluctant to buy drinks, potato chips and oatmeal. After all, these are all products of the group. However, what a surprise, net revenue was up 17% due to higher prices and changes in the sales mix.

The ability of companies like PepsiCo to pass on higher costs to its customers in the form of price increases means inflation protection for the owners - i.e. the shareholders. Only those with a special market position can push through higher prices. At PepsiCo, it is the company’s strong brands that keep shoppers reaching for their familiar pack of Doritos Nacho Cheese - even if they might cost 1.75 instead of 1.50 euros. Maybe the price does not go up at all and there are just 5 fewer chips in a bag; the marketing imagination knows no bounds.

This pricing power has enabled companies like PepsiCo to increase dividends every year for the past 50 years. A cautionary note is in order here: past results are not a reliable indicator of future results, and whether the stock is a buy recommendation depends additionally on factors such as the current stock market price and the associated valuation.

Great companies instead of the stock market

Over time, the share price follows the fundamental business development. For example, how earnings, free cash flow and dividends per share develop. Other key figures such as book value, debt or margins can also be important - depending on the respective business model. This needs to be researched and compared in order to form an opinion on each individual stock.

In the Gutmann equity strategies, we do this work for you and delve into the individual companies. We do not just invest in the stock market, but in equities of successful companies.

[1] Author Simon Sinek has written an entire book on infinite games,  "The Infinite Game".

Disclaimer: This is a marketing communication. Investments in financial instruments are exposed to market risks. Past performance or forecasts are not reliable indicators of future results. Tax treatment depends on each client's personal circumstances and may change in the future. Bank Gutmann AG hereby explicitly points out that this document is intended solely for personal use and for information only. Publishing, copying or transfer shall not be permitted without the consent of Bank Gutmann AG. The contents of this document have not been designed to meet the specific requirements of individual investors (desired return, tax situation, risk tolerance, etc.) but are of a general nature and reflect the current knowledge of the persons responsible for compiling the materials at the copy deadline. This document does not constitute an offer to buy or sell or a solicitation of an offer to buy or sell securities. The required data for disclosure in accordance with Section 25 Media Act is available on the following website: https://www.gutmann.at/en/imprint

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