Inflation no longer assumed to be ‘transitory’
Investors are being complacent about rising inflation and dismissing it as only ‘transitory’, according to Yarra Capital Management, as reporting season indicates it might be already here.
Based on the first few weeks of reporting season, the firm said, certain factors were indicating inflation was widespread beyond being limited to a few sectors such as airfreight.
These included mining costs, construction costs, cost recoveries, insurance prices and tightening labour.
Labour shortages had been mentioned by many companies in their full-year results including BHP, Commonwealth Bank, equipment company Brambles and Dominos Pizza while BHP also stated production costs would be going up by 21% in coal and 17% in iron ore.
Dion Hershan, head of Australian equities at Yarra, said: “Our strong sense is most investors are either complacent or dismissive of the issue, and only when they start to see margins and earnings decline the issue will the topic come into sharper focus.
“It was easy to dismiss inflation as being ‘transitory’ when it appeared in a select few items (lumber, airfreight), but company results confirm just how far-reaching it appears to have become. This has significant implications for rates and the margins of public companies. As one company reprices to recover input cost inflation, it can become self-perpetuating.”
As a result of their inflationary views, Yarra was skewing its portfolios towards high quality companies which had attractive industry structures and strong pricing power. These included James Hardie, Aristocrat and ResMed.
All three of these stocks had returned more than 50% over one year to 19 August, 2021, with James Hardie returning the most at 71.9%.
Share price performance of Resmed, James Hardie and Aristocrat over one year to 19 August 2021
AUTHOR
Laura Dew
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