Which stocks to invest in High inflation

are increasing their interest rates. Generally, interest rates are increased to control inflation.

Now, the stock market goes down when interest rates are higher.

Now we have already seen in the last 2-3 months, USA market, developed market or even Indian market.

There has been a significant correction in the stock market. So in this inflationary scenario,

how should we invest? Which asset to invest in?

Particularly in which stock to invest and which stock to avoid?

We are going to discuss this in detail in this post.

Post will be intersting,

Stay tuned.

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In which stock or asset to invest?

To understand this we first need to understand some context. For that let’s first understand Inflation.

That, how does Inflation affect us?

See, there are two types of inflation measures, not just in India but in most countries.

One is the Wholesale Price Index , which we call WPI in short. This affects our Business to Business  transactions. Like all the commodities, steel, cement or any other commodities, which are used in manufacturing. Their prices have become very high in India. the latest inflation rate of Wholesale Price Index has come 15%.

This is very high if we compare it to previous years. But this WPI of 15%, has not fully translated, to CPI.

CPI stands for Consumer Price Index.

When we purchase a commodity as a consumer, how much inflation rate into it? Now, about data 7.5% has come as of April. And this CPI rate also, you can see is having an increasing curve. So in the upcoming time, we can expect that the inflation rate could increase more. So to control this inflation,

what does any central bank do?

Like RBI in India. It starts increasing its interest rates. Interest rates are increased under compulsion. Because if in the market, supply of money is high, then inflation rate increases,

That’s why to control the supply of that money,

interest rates are increased. That means, so that people take fewer loans, supply is tightened a little in the market.

And this is happening in the entire world and India. Because during Covid-19 many countries printed a lot of money.

So, if the money that is currency floats a lot in the market, the goods are the same.

So their prices start to increase. This way inflation rate increases. So in this scenario where interest rates are increasing,

how it affects any business?

Generally any business, can do only two things, when inflation is rising. Either they increase the price for its consumers. Or secondly, It absorbs all the high costs on its own So their margin starts to hit.

And generally why does any business do this? They do this to keep their volume maintained.

If they raise the prices a lot, maybe their consumption could fall.

So where to invest during inflation? Or in which stocks to invest?

Generally when inflation is high, and the stock market starts to go down. So two assists are considered quite safe, Real estate and gold.

So if we talk about real estate, and if we invest in rent generating properties, So rent keeps on increasing with inflation. That’s why real estate is also considered a safe bet. Secondly,

Gold always performs well when stock markets begin to plummet. Especially at the time of recession or correction.

Now, we can definitely consider real estate and gold during high inflation times. But, one other asset is also promoted a lot, as a hedge against inflation.

Yes. I am talking about Cryptocurrency.

Now especially after Covid-19, there has been a boom in cryptocurrency. And the main argument to invest in cryptocurrency was this, that because the government has control, over how much money it can print, high inflation occurs because of this. To avoid this we can invest in cryptocurrency. See, I am not going into that argument nor I’m saying against cryptocurrency. Basically let’s analyze the latest data, and see if cryptocurrency as a good edge worked against inflation. If we look at the latest data, whenever inflation rates rose, or stock markets plummeted. During crises like these, generally gold performs better. But at crises times like these cryptocurrency also plummeted along with stock markets.

So data suggest that there is a high correlation between cryptocurrency and the stock market.

That means both of them, are high risk investment class. So this was about gold, real estate and cryptocurrency.

Now let’s talk about stocks, and how do we invest in stocks.

Now, when we invest in a stock, in a way, we invest in the company’s business.

When its stock price increases, then only we profit.

Why will the stock price of a company increase?

Because when it’s earnings, its profit increase then only that stock price will rise. But during high inflation, pressure increases a lot on earnings.

Why does the pressure come?

Because all their input cost, raw material costs, salary cost, start to increase.

So in this situation, any business has  mainly two outcomes, either it bears all the input cost on its own, that means its profit margin will begin to shrink.

Generally, any business does this when they need to maintain their volume. That means they don’t want their volume, and sales to drop. They want to move forward maintaining their price. So their margin begins to squeeze a lot.

In that cases, stock market gets affected a lot.

The second outcome is that business can increase their price easily, without hitting any volumes.

So their margin could be maintained easily, without hitting volumes.

In this situation, I understand investing in three types of businesses. First business,

Where companies have pricing power.

That means even if they increase a rate of 10%, then also their volume won’t decrease a lot.

And what type of business these could be?

Businesses with high moat, businesses with competitive advantage. Or the brand is very strong. For example, FMCG companies,

they are generally considered defense stocks. That person will continue to buy soap and shampoo.

Once people get used to a particular soap, shampoo or oil generally, people continue to buy that.

Or the retail store you go to buy the commodities, you buy from there only.

Other than that, the pharma sector also has pricing power, because even if the rate of medicine will increase a little bit,

it won’t affect a lot. Other than that there could be a company where, switching costs become very high.

Suppose someone is used to editing in Adobe Premiere Pro, they won’t suddenly switch on software. Even if Adobe increases its price a little bit, then also they might buy it.

People won’t suddenly switch from Apple’s products as they are used to the ecosystem.

Similarly if someone does share trading, if someone uses their app,

they suddenly won’t start using another app, just because, 2-5% rate increased or brokerage charge increased.

Or nowadays we have internet connection in our homes, anyone won’t just switch their internet connection, because they increased rates by 5-10%.

Generally, we don’t have many options. On today’s date, we have Jio, Airtel.

So these types of businesses where companies have pricing power, these businesses are the best at inflation times,

these definitely survive. Historical data tells us, that in crises these type of companies always performs better.

So the first type of business that we saw earlier, here companies can progress by maintaining their margin, they can forward high prices to the consumers.

What can be the second type of business?

Where although their margin shrunk but, the business is so high growth its volume increased. Suppose someone’s margin is cut to half but their volumes double,

Then also it could progress with similar profits. And if any company wants to increase its volume and a huge capital requirement for that, so we should not invest in these businesses too.

But if there has already been a significant investment in any business, now to increase its volume only a few additional investments are required. That could be a good business.

For example, a cement company wants to increase its volumes. So they need to do capital expenditure in the same ratio because they either need to enhance their cement plant or need to open a new one.

So we are not talking about these types of businesses here. We have to invest in those types of businesses where, low incremental income is required.

For example, if there is an online media agency. If they just increase some additional ads.

In place of two, starts showing three ads to someone. So their additional investment is not very significant.

But they can definitely increase their revenue. Or if there is an online education company which has already made all of its contents.

Now if they increase a little bit expense on marketing, so they can onboard more customers. So we can definitely think of investing in these types of businesses. The third business is, any business which doesn’t have a lot of debt.

That means the company haven’t already taken a lot of loans. Now, we have seen interest rates begin to rise as well. Now when the interest rates will increase, a lot of companies which, have high debt , which have taken high loans,

The interest cost on them will also start getting higher. Interest cost could also be a very huge cost component. So their margins can get very affected.

So during crises, we should definitely avoid high debt companies. So we talked about assets and stocks.

There is one more way with which we can definitely beat inflation. And this I think is the best method.

Warren Buffet says:

“The best way to beat inflation is to increase your earning power.”

That means if we invest in ourselves and develop our skillset, If we increase our earning power, we can definitely beat inflation.

So this was our quick post on how to invest during high inflation times.

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