WHILE THE global media is making a hue and cry about rising inflation and its effect on the purchasing power of consumers, the other side of the coin seems to have been totally ignored. It is true that high inflation is hitting consumers hard, but investors can turn this to their advantage. Yes, there are a few industries which are gaining from inflation and investing in them will be a wise decision in the long run. The law of physics states that energy cannot be destroyed, but can be transferred from one form to another. Similarly, it can be said that in an economy, money cannot be destroyed (although unlike energy, it can be created out of thin air!), but transferred from one hand to another. Hence, if you are losing money due to inflation, there ought to be someone who is making money because of it. ETIG studied a host of industries to find out the leaders and laggards of inflation.
The A, B, C Of Inflation
But first, we need to analyse and understand the nature of current inflation. The current inflation is broadbased, as well as global. It is driven by rising demand for agricultural, metal and fuel products. Most experts agree that the present inflation is not a case of ‘lot of money chasing too few goods,’ but a genuine case of supply shortages.
India’s inflation, referred by the benchmark wholesale price index (WPI), had remained at around 4% for over six months since September ’07, but started rising in early ’08. For the week ended March 30, ’08, inflation reached a three-year high of 7.41% — substantially above Reserve Bank of India’s (RBI) target of 5%.
An important characteristic of the current rally in WPI figures is that it is widespread — the price index of manufactured goods jumped by 7.12%, primary articles by 8.89% and power & fuels rose by 6.65%. Primary articles have emerged as the largest driving factor for inflation over the past few weeks.
It must be noted that the current high inflation figure is suppressed, as the complete burden of rising oil prices is not passed on to consumers.
Losers & Gainers
There is a general belief that inflation is bad for the economy and industries. However, in reality, moderate inflation, coupled with adequate liquidity, is necessary for the industrial growth of any economy.
Amitabh Chakraborty, president (equity), Religare Securities says, “Moderate inflation is good for the stock market because a company’s pricing power increases, but a persistent inflation above 5%, with no growth, is stagflation, which is actually negative for the economy.”
Spiralling inflation above moderate levels hurts economic growth in different ways. The current inflation is building up raw material cost and hence, putting a pressure on margins. If this burden is passed on through an increase in prices of end products, the industrial sector will be least affected because of inflation.
But even the pricing capacities of these industries have limitations. Another factor is policy intervention to contain inflation and inflationary expectations. Fiscal and monetary measures undertaken for containment of inflation are more devastating than the underlying inflationary pressure.
Mr Chakraborty elaborates, “All interest-sensitive sectors will be hit, be it real estate, banking & financial services, automobiles and retail industry. We also believe the FMCG sector will be hit because higher inflation means less purchasing power in the hands of common man to buy soaps and oil.”
With a rise in prices of agricommodities, the FMCG industry may witness a pressure on margins if it cannot effectively raise prices. Vivek Pandey, fund manager, SBI Magnum Mutual Fund, says, “High costs will bring down operating margins of FMCG players by 30-40 basis points, which is more likely to be seen in Q1 FY09.”
But available evidence suggests that FMCG companies have so far done well and are posting strong growth in earnings, thanks to rising toplines and stable or rising operating margins. A similar trend is visible in other sectors including capital goods, chemicals, metals including steel, and cement among others (refer to Page 2).
Financials services, commodities and oil marketing companies are bound to face the brunt of inflation, says Rajat Rajgarhia, head of institutional research at Motilal Oswal.
He further adds, “It is a generally used strategy to raise interest rates to combat inflation. This will tighten money supply, which will affect the banking sector. Going forward, thanks to the government’s intervention, commodity industries such as cement or steel can also face a curb on free pricing.”
Make The Most Of It
Nonetheless, there is always an opportunity even in the worst of times. Out of the 16 industries analysed by ETIG, more than half show a positive or neutral impact of inflation. This offers investors a good opportunity to park their funds in inflationproof stocks. So, even though investors’ household budget may have gone out of shape, returns from the equity market may provide some insulation against the rising cost of living. Anyhow, in the long run, equity is the best hedge against inflation. As for your household budget, things may ease only after the next 6-7 months, when the government’s anti-inflationary measures begin to show results.
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