UK inflation has gone above 10% for the first time since 1980, and is expected to top out at 13%. So where should you be investing to protect your portfolio and how can you protect your capital in this inflationary environment?
To understand which sectors to invest in, we need to understand how consumers behave when there is a squeeze on household finances. The main driver behind this is an economic concept called ’price elasticity of demand’ – which just means how much a company can raise prices without impacting the demand of their product.
Elastic demand, means that a change in price will have a corresponding change in demand. Whereas demand for inelastic goods and services does not change when the price changes.
If we can identify which goods and services will be impacted by price rises due to inflation then we can accurately identify which sectors will remain profitable and strong during inflation.
With this in mind, consumer staples are an obvious choice, because most households will generally just have to accept higher prices for food and household staples.
Why consumer staples? Because everyone needs to eat, and purchasing food is a weekly constant regardless of the broader market. So investing in companies with a broad product range at both the lower end of the market and the luxury end. For example, Unilever and other household names like Nestle and Procter & Gamble come to mind, as they have a massive product range of household items which are sold across the globe.
Then at the opposite end of the market, we have luxury brands, not mass market luxury, but high-end luxury. These companies have the power to pass their costs onto customers because their products tend to be price inelastic and the demographic that buys those goods and services are unlikely to be impacted by rising prices and household costs. So consider, private jet leasing firms or high-end brand houses such as the world’s biggest luxury group, LVMH.
Another thing to prioritise in this inflationary environment is getting your tax affairs in order, and opening that ISA. When inflation eats away at your returns, you will want to minimise any further losses due to taxes.
And finally, in times of inflation, keeping cash on hand is expensive, and you will probably get a better return investing sensibly in equities by picking the right sectors, so invest any spare cash so it makes your money work harder for you.
To summarise, invest in a diverse range of consumer staples, add in other price inelastic goods, and open a Saxo Stocks and Shares ISA
to minimise your tax burden.