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Written by: Carla O'Shaughnessy | Hargreaves Lansdown
Steve Clayton, HL Select Fund Manager, said:
“Inflation is back. This is a global phenomenon, not just a domestic problem. The pandemic imposed additional costs on businesses which they are now seeking to claw back. Supply chains were hit by plant shutdowns, shipping disruption and labour shortages, to name just a few. The conflict in Ukraine is further escalating inflationary pressures, driving up energy prices. Ukraine’s major agricultural exports, like wheat, have also seen their prices squeezed higher by the conflict. If supply chains were not already under significant pressure, this is causing further headaches for impacted firms.
Many people reassessed their lives as the pandemic developed and resignations soared afterward when firms tried to bring workers back to jobs they had, in fact, decided they did not wish to do. Employers are now struggling to find enough staff and are having to push wages up to attract and retain workers. Energy prices, which plummeted in the early pandemic have bounced back, putting substantial additional costs onto businesses and households alike.
Businesses now face the challenge of maintaining their profit margins in the face of all these new cost pressures. Price-takers could see their profits squeezed, whilst price-setters stand in control of their own destiny. Pricing power has always been a great quality for a business to possess, nowadays it is essential if a business is to preserve and grow its value.
Possessing something valuable and unique that customers cannot easily find elsewhere is a winning strategy in this environment. Software can fit this bill, so the first stock to watch is Microsoft. Only Microsoft can supply Windows or Office and few businesses would fancy their chances of prospering without them. So Microsoft can increase its prices every year. There’s a lot more to Microsoft than just these two products, but to have such huge, cash generative franchises at the heart of the group leaves it well-placed to thrive in any environment.
Back at home, why not take a look at Rentokil. No one puts up with rats in the kitchen because the catcher put their price up by 5%. What Rentokil does is essential to their customers, and whilst there is competition, having a strong brand and reputation for service is a powerful protector of margins. The company is in the middle of executing a major takeover, adding Terminix to its US pest division which should offer plenty of scope for cost synergies in the years ahead. This gives Rentokil further scope to grow and defend its margins, despite today’s inflationary environment.
EMIS Group provides the software used to run GP practices and community pharmacies. Over 80% of EMIS Group’s revenues recur each year under long term contracts agreed within NHS framework agreements. This gives the group exceptional visibility of its income and with price escalations built into the contracts the group is well protected from cost pressures. With the group well positioned as a conduit for sharing data across NHS bodies EMIS should accelerate its growth in the years ahead.
Tritax Big Box REIT owns and builds giant distribution centres, that sit alongside major roads and motorway junctions. These distribution centres are at the heart of the digital economy. Businesses often run the sharp end of their ecommerce operations from them. Amazon is the largest tenant in the portfolio. Occupiers take long leases with inflationary clauses built in, ensuring that Tritax’s income rises steadily. Demand for these assets is strong, and prices have been pushed higher. With no business that we know of planning to use less technology or do less business digitally, this buoyant demand seems set to continue, leaving Tritax well placed to grow.”