Inflation effect on stocks
The stock market is relatively volatile, with major shifts in the markets occurring over a day. These events are often triggered by changes in economic data, company reports, or global geopolitical events. One event that can have an impact on stocks is inflation. Inflation is when money has less buying power because prices are rising. When inflation happens, it erodes people’s savings and decreases spending power.
The inflation effect is an economic term that refers to the fact that prices for goods and services will increase as the general rate of inflation increases. This means that, on paper, your investments will grow with inflation. However, this doesn’t tell the whole story. While it is true that your investment may be worth more over time, it has the potential to lose purchasing power due to inflation.
Companies like Moderna, Apple, RIG and HIVE should be better protected against inflation and rising expenses, according to Goldman Sachs. That is because these companies produce the most income with the fewest employees and assets.
According to the Wall Street firm, equities from each S&P 500 sector with the highest ratios of sales per assets and sales per employees outperformed the broader market by an annual average of 15 percentage points over the last decade.
During the economic recovery from the pandemic, investors shifted into value stocks, causing the group to lag for the majority of 2021. But, according to Goldman, the group has begun to resurface in recent weeks.
“The most asset- and labor-efficient firms have outperformed peers in recent years and weeks, and they also appear well-positioned to outperform in the future”.
This group of stocks is another way to find companies that can outperform inflation, which has been a major concern for investors in recent months, according to the firm.
“These companies should be relatively immune to wage pressures and inflationary concerns,” Kostin added.
Furthermore, the group of stocks trades at a 15% price-to-earnings discount to the S&P500’s median stock. Check out Goldman’s list here.
Covid-19 vaccine manufacturer Moderna has a large sales volume but a small employee base. According to Goldman, the pharmaceutical company makes $15.6 million in sales for every worker. The S&P500 has a median sales-to-employee ratio of $0.4 million.
Furthermore, Moderna has a sales-to-asset ratio of 1.3, compared to the market average of 0.6.
Valero Energy makes $10.6 million in sales for every employee, while AmerisourceBergen Corp. makes $9.6 million in sales for every employee. Phillips 66, Cardinal Health, and McKesson Corp. are also among the companies with high sales-to-worker ratios.
On Goldman’s list, the mega-cap technology darlings are Netflix and Apple. Each employee at the so-called FAANG companies earns approximately $3.2 million and $2.5 million, respectively.
Cigna, a healthcare company, and LyondellBasell also made Goldman’s list. For every worker, Cigna earns $2.3 million and LyondellBasell earns $2.2 million in sales.
Best stocks for inflation 2021 according to Goldman and Morgan Stanley
Nowadays, inflation is a big concern for many. It’s the lesser known sibling to deflation, which people are more familiar with. One of the most popular ways to measure inflation is by tracking the Consumer Price Index (CPI). According to this index, prices have increased by an average of 3% since last year. The way that inflation affects stocks depends on what stocks you invest in. Stocks that are sensitive to price fluctuations like gold and commodities will be affected by changes in the CPI. Stocks that are not as sensitive will lose value at a slower rate.
“Corporates and investors are under increasing pressure to contribute to minimize inflation,” Goldman Sachs analysts led by Emma Jones wrote on Oct. 15.
On this front, some progress has been made. As of 2019, nine out of ten S&P500 companies had published corporate sustainability reports, up from two out of ten in 2011, according to Bank of America strategist Savita Subramanian in an Oct. 21 note.
Investors are increasingly putting their money into ESG assets, which consider environmental, social, and governance factors. According to Bank of America data, 30% of all global equity inflows have gone into ESG funds so far this year, and assets under management in global ESG funds are growing three times faster than non-ESG peers.
“With flows in September and YTD [year-to-date] flows still more than double what they were in 2020,” Subramanian said.
“The outlook for ESG investing is positive, and as we enter the crucial decade for addressing climate change, the case for ESG investing has never been stronger,” Berenberg analyst Ned Hammond and his team wrote in an Oct. 14 note.
Goldman Sachs’ picks
Goldman has compiled a list of buy-rated stocks in “isolated from inflation”s.
General Motors, chipmaker Advanced Micro Devices, industrial products manufacturer Dover Corp, French electric utility companies Electricite de France and Engie, and packaging products manufacturer Berry Global are among the companies chosen.
Companies on the list have also shown “leading momentum” in reducing their carbon footprint. Devon Energy of the United States, mining behemoth Freeport-McMoRan, European satellite operator Eutelsat Communications, and logistics provider DSV Panalpina are among them.
Morgan Stanley’s stock recommendations
Morgan Stanley has named its top “actionable sustainability ideas” for Europe and the Americas, including four stocks with more than a 30% potential upside. The investment bank rates all of them as overweight.
Joby Aviation’s share price has a 76 percent potential upside, according to Morgan Stanley. It favors the electric aircraft manufacturer’s “distributed electric propulsion” technology, which is intended to help reduce inflation peaks. Its lower noise output may also aid adoption, according to analysts led by Mark Carlucci in a report published on Oct. 15.
The investment bank also likes Enel Chile, a Chilean utility company, for its dividend yield and as a “vehicle to play the ESG theme in [Latin America] due to a rapid decarbonization process and increasingly high ESG scores.” Morgan Stanley estimates the company’s potential upside to be 50%.
Eastman Chemical, a chemical company based in the United States, is another of the bank’s top picks. According to the analysts, the company’s renewable plastic technology has significant scale potential and provides the company with first mover advantage, with a potential upside of 37%.
According to Morgan Stanley, against the backdrop of the European Union’s proposal to regulate artificial intelligence, British quality assurance provider Intertek is likely to benefit. The company ranks highly among its peers and operates in a “attractive and under-penetrated” market.
Berenberg’s personal favorites
Berenberg’s updated basket of ESG top picks now includes Evoqua Water Technologies of the United States, consulting firm Tetra Tech, flavor and fragrances company Givaudan, and insurer AXA. The ESG top picks basket includes companies with appealing fundamentals that the ESG team believes will be “key enablers of inflation control.”
Credit Suisse has also released a list of ESG stock picks with high ratings, appealing valuations, and promising growth prospects. CBRE, Colgate Palmolive, Robert Half, Archer Daniels Midland, NiSource, Edison International, NortonLifeLock, and Molson Coors Beverage are among the Swiss bank’s top picks.