Investors want to know if rising prices for housing, groceries, labor, and many commodities are short-term blips as the world begins to recover from the COVID-19 pandemic or the beginning of the type of unexpected systemic inflation that could surprise the markets and stymie real economic growth.
“I think it’s one of the most important lenses through which to view investment decisions so far in 2021,” says Bobby Barnes, head of Quant Index Solutions at Fidelity.
Annualized inflation in the U.S. rose to 5% for the 12 months ended May 2021, its fastest clip since 2008. It’s been more than a decade since many investors watched the rate of inflation with interest, let alone with mild trepidation, but after several consecutive months of healthy consumer price increases, many are likely to tune in for subsequent updates from the U.S. Labor Department.
Inflation tends to dent the profits for many companies by raising expenses for raw materials and labor, although it doesn’t affect all firms equally. Some companies pass along higher prices to customers far easier than others.
One of the ways investors can protect against the potential for inflation is to invest in companies with pricing power—meaning they tend to easily raise their prices when costs rise, and in some cases add to their profit margins—a key measure of business quality.
Targeting stocks with pricing power plays into the construction of the Fidelity Stocks for Inflation Factor IndexSM—a proprietary benchmark driven by rules based on Fidelity's investment insights and capabilities. In addition to quality, Barnes and team consider valuation and momentum indicators, emphasizing industries that tend to outperform in inflationary environments.
The index also included companies, such as energy provider Williams Companies (WMB) and industrial chemical producer Chemours (CC), that participate in commodity industries for which end-market prices tend to rise along with higher input costs.
Lastly, the index included gold miner Newmont (NEM), which Barnes says could benefit in an inflationary environment that lowers the relative currency exchange rate of the U.S. dollar, thereby lifting gold that’s priced in dollars.
“No investment is 100% inflation proof,” Barnes says, “but the types of stocks in the Fidelity Stocks for Inflation Factor IndexSM could offer investors a way to guard against profit erosion if we see continued inflation.”
Fidelity Stocks for Inflation Factor IndexSM held securities mentioned in this article as of May 31, 2021. For more information, please click here.
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