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[ INFLATION / DEFLATION ]
“Pricing power comes from
selling products or services
which are of real importance
to customers and are not
easily bought elsewhere or
substituted, being protected
through intellectual property,
brands, assets and skill sets”
economy. And you might find one
pocket rises and another catches up.”
Paul Jourdan, manager of the TB
Amati UK Smaller Companies fund,
says certain types of equities do
better than others in an inflationary
environment. Unsurprisingly, the key
trait to look out for is pricing power –
something that is at the forefront of
his investment process.
“It is one of the defining
characteristics of a growth company,”
he says. “Pricing power comes from
selling products or services which
are of real importance to customers
and which are not easily bought
elsewhere or substituted, being
protected through unique intellectual
property, brands, assets and skill sets.
Over the next few years this is likely
to be even more important than ever.”
Dannatt says a good example of
a company with pricing power is
Tesco – its status as the dominant
UK supermarket lets it raise prices in
line with the prevailing market in an
inflationary environment, allowing
it to maintain margins on a gently
appreciating top line.
Even better than a company with
pricing power, he adds, is one that
doesn’t see an equivalent rise in costs.
“Labour costs rank among the
most demanding liabilities for any
business,” the investment director
explains. “That’s why we like Disney:
the US media conglomerate owns all
its content and its new streaming
service, Disney+, is well positioned
to grow on higher margins. Unlike
the Premier League where
football players have all the pricing
power, Mickey Mouse is yet to ask for
a pay rise in 92 years of service.”
The missing link
Away from equities, Dannatt says
there are numerous other assets
that investors can rely on in an
“Disney+ is well positioned
to grow on higher margins.
Unlike the Premier League
where football players
have all the pricing power,
Mickey Mouse is yet to ask
for a pay rise in 92 years of
service”
inflationary environment. He
believes the most powerful of these
are index-linked bonds.
“As opposed to their conventional
counterparts, index-linked bonds pay
a coupon and have a redemption value
linked to the rate of inflation, pricing
off the difference between interest
rates and inflation,” he explains. “This
means, with rates pinned down, even
moderately high inflation should see
them do very well.”
Then there is the classic inflation
hedge: gold. Unlike with paper
money, the commodity’s purchasing
power cannot be diluted, with
Dannatt noting the asset is
particularly potent in the context of
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