The market is telling you what to own during inflation The market is telling you what to own during inflation The market is telling you what to own during inflation

The market is telling you what to own during inflation

Equities 7 minutes to read
Peter Garnry

Head of Equity Strategy

Summary:  In today's equity note we show what equity themes have worked well over the past year with rising inflation and interest rates and it is clear that portfolios consisting purely of growth stocks must diversify into themes such as commodity sector, logistics, semiconductors, financial trading, mega caps, travel and defence. Adding these themes will diversify equity portfolios and make them able to absorb inflationary pressures while also reducing the sensitivity to higher interest rates.

Theme basket performance shows what works during inflation

With inflationary pressures evident everywhere in the world, having caused the Fed to make its hardest U-turn on inflation and interest rates since the 1970s, investors must build portfolios around the idea that the inflation rate is here to stay at a higher level than the previous 30 years. The impact on equities from higher inflation and interest rates have been felt across our Bubble Stocks, NextGen Medicine, E-commerce, Green transformation, Gaming, Payments, and 3D Printing theme baskets. The denominator for all of these themes have been excessive expectations and thus prohibitively high equity valuations.

As our theme baskets also show during rising inflation expectations and interest rates themes such as the commodity sector, logistics, semiconductors, financial trading, mega caps, travel and defence have done well. We also believe the cyber security basket could be added as an inflation basket as cyber security is less correlated to the economic cycle because it has become a necessity and thus the industry has pricing power.

Commodity sector is the best performing theme and must own sector

Our Commodity Sector basket is especially interesting this year being the best performing basket up 3.4%. Given the bloodbath in growth stocks having had exposure to commodities would have shielded some of the impact from the Fed’s December pivot on interest rates and inflation. Our view is that most retail investors have a too high exposure to growth stocks but instead of panicking and selling their stocks they should instead balance their portfolios across components that can do well during inflation.

The table below shows the constituents in our Commodity Sector basket which covers companies across agriculture, chemicals, energy and mining. There are also plenty of ETFs covering commodity futures, the energy sector, agriculture sector and mining companies.

NameCategorySub-categoryMkt cap (USD, mn.)Sales growth (%)EBITDA growth (%)Diff to PT (%)5Y return (%)
Deere & CoAgricultureMachinery114,72323.944.48.4274.8
Corteva IncAgricultureSeeds and crops protection33,6009.983.617.4NA
Archer-Daniels-Midland CoAgricultureIntegrated agribusiness40,43132.528.50.488.9
Nutrien LtdAgricultureAgricultural chemicals39,85320.8112.017.1NA
Kubota CorpAgricultureMachinery24,90817.741.214.942.1
Bunge LtdAgricultureIntegrated agribusiness13,53139.280.45.964.2
WH Group LtdAgricultureMeat processing8,3823.9-1.959.82.1
Wilmar International LtdAgricultureIntegrated agribusiness19,69127.413.639.426.0
Muyuan Foods Co LtdAgriculturePigs and feed products43,89454.0NA35.6909.5
Inner Mongolia Yili Industrial Group Co LtdAgricultureDairy products38,31013.4NA34.4135.8
Ingredion IncAgricultureSweeteners and starches6,26513.3-23.817.5-16.3
Linde PLCChemicalsIndustrial gas157,20210.022.518.6182.6
Air Liquide SAChemicalsIndustrial and health care gases81,048-
BASF SEChemicalsDiversified chemicals69,88929.064.416.8-6.1
Air Products and Chemicals IncChemicalsIndustrial gas61,27616.62.920.7118.8
DuPont de Nemours IncChemicalsDiversified chemicals39,7592.2819.525.5-2.0
Wanhua Chemical Group Co LtdChemicalsDiversified chemicals45,37391.3NA63.5424.9
Chevron CorpEnergyIntegrated oil & gas255,78529.
Exxon Mobil CorpEnergyIntegrated oil & gas314,00423.165.81.312.7
Shell PLCEnergyIntegrated oil & gas198,087-0.26.313.316.3
TotalEnergies SEEnergyIntegrated oil & gas153,53023.753.73.949.4
PetroChina Co LtdEnergyIntegrated oil & gas143,88612.2NA19.8-19.5
Enbridge IncEnergyTransportation83,6757.75.06.826.4
Neste OyjEnergyRefining and marketing31,7283.4-16.051.5285.6
ConocoPhillipsEnergyExploration and production114,82872.4122.19.7101.8
Phillips 66EnergyRefining and marketing37,26624.052.213.924.9
Schlumberger NVEnergyOilfield services and equipment55,855-2.8NA7.1-44.3
Koninklijke Vopak NVEnergyTank terminal operator4,2510.3-36.340.9-20.0
BHP Group PLCMetals and miningIron ore and copper163,74841.766.1-5.1142.3
Rio Tinto PLCMetals and miningIron ore and aluminium121,48139.5100.4-3.6135.8
Vale SAMetals and miningIron ore79,70777.2160.412.095.6
Southern Copper CorpMetals and miningCopper49,94939.782.4-8.0103.2
Newmont CorpMetals and miningGold49,19410.2-3.45.6101.9
MMC Norilsk Nickel PJSCMetals and miningPalladium, nickel and copper44,42227.185.720.0187.4
Anglo American PLCMetals and miningPlatinum, Copper and iron ore56,28259.0143.8-3.1221.0
Glencore PLCMetals and miningEnergy and metals71,259-7.528.17.843.9
ArcelorMittal SAMetals and miningSteel27,94028.1940.449.119.9
POSCOMetals and miningSteel18,64832.2102.169.411.2
MP Materials CorpMetals and miningRare earth minerals6,932NANA26.7NA
Lynas Rare Earths LtdMetals and miningRare earth minerals5,74560.3306.911.0947.6
Aggregate / median2,926,33223.759.014.464.2
Source: Bloomberg and Saxo Group
* Diff to PT (%) is the difference between the price target and the current price in %

In our recently published Quarterly Outlook Q1 2022 we highlight the global energy sector as a sector with a strong expected return. The global energy sector has a shareholder yield (dividends + buybacks) of 5% and with an annualized growth rate of 5.1% in dividends and buybacks the sector has an expected return of around 10%, which is quite attractive in an inflationary environment because higher inflation will lift the price of energy and thus preserve purchasing power of capital.

Financial trading firms and market makers as hedging

Another interesting theme during rising interest rates and inflation are financial trading firms. These companies benefit from higher interest rates which in turn creates more market volatility which they also benefit from. In our view, financial trading firms will add great diversification to equity portfolio during inflationary pressures. The list below shows the constituents in our Financial Trading theme basket.

NameSegmentMkt Cap (USD mn.)Sales growth (%)EPS growth (%)Diff to PT (%)5yr return
Morgan StanleyInstitutional brokerage177,50116.125.814.3158.2
Charles Schwab Corp/TheMulti brokerage170,17356.932.313.3126.2
Goldman Sachs Group Inc/TheInstitutional brokerage119,73021.588.330.057.9
S&P Global IncFinancial information95,80710.516.426.2245.5
Hong Kong Exchanges & Clearing LtdExchange & clearing74,10623.522.515.1171.5
CME Group IncExchange & clearing79,115-5.7-6.06.9114.8
Intercontinental Exchange IncExchange & clearing68,82023.29.327.1124.5
Coinbase Global IncExchange (crypto)38,444649.5NA95.3NA
London Stock Exchange Group PLCExchange & clearing52,192105.716.130.1138.7
CITIC Securities Co LtdInstitutional brokerage53,16526.036.418.052.3
MSCI IncFinancial information40,57520.527.038.1525.8
Deutsche Boerse AGExchange & clearing33,1384.47.29.8117.2
Interactive Brokers Group IncMulti brokerage27,99318.536.850.084.6
Nasdaq IncExchange & clearing28,34417.811.123.7170.6
MarketAxess Holdings Inc (*)Electronic bond platform12,6501.4-14.315.291.3
Tradeweb Markets IncElectronic bond platform19,10320.538.424.1NA
Raymond James Financial IncInstitutional brokerage20,44025.196.828.8109.3
Japan Exchange Group IncExchange & clearing10,5762.31.516.166.9
LPL Financial Holdings IncInstitutional brokerage13,05025.67.129.2346.0
Cboe Global Markets IncExchange & clearing12,24813.56.621.057.6
Euronext NVExchange & clearing9,97038.516.229.7141.6
Virtu Financial IncMarket-making5,329-6.2-36.49.5104.6
Avanza Bank Holding ABRetail brokerage4,73540.248.728.2301.7
Nordnet AB publRetail brokerage3,82348.538.550.5NA
IG Group Holdings PLCRetail brokerage4,99410.912.021.7115.3
flatexDEGIRO AGRetail brokerage2,148131.761.690.8406.2
Swissquote Group Holding SARetail brokerage2,48947.6115.648.8569.6
Monex Group IncRetail brokerage1,28975.3445.458.898.2
CMC Markets PLCRetail brokerage928-17.1-44.343.5173.1
Flow TradersMarket-making1,771-46.0-54.61.752.4
Aggregate / median values1,184,64621.016.426.6124.5
Source: Bloomberg and Saxo Group
* Peter Garnry has holdings in the following companies

Finally, we believe investors should consider adding market makers to their portfolio as insurance components against tail-risk losses (big declines) in the portfolio. There are essentially two publicly listed market makers in the world (Flow Traders and Virtu Financial), and we wrote two notes (here and here) last year about their hedging capabilities during equity selloffs. This year they have proven that the idea is not a bad one.


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