Inflation provides opportunity for bottom-up stock pickers

Inflation-proofing portfolios may be almost impossible, an Edinburgh-based investment managers says, but large companies should have an advantage over smaller competitors — and the former may even see rising prices as an opportunity.

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One of the most persistent debates among portfolio managers this year has been the extent to which inflation should worry investors. But Murdo MacLean, client investment manager at Walter Scott & Partners Ltd. in Edinburgh, Scotland, said it could take months before we know for certain whether we’re seeing a systemic rise in inflation or a spike driven by a temporary supply-demand imbalance.

“I think it’s also important to stress that inflation-proofing an equity portfolio is virtually impossible because inflation can take many different forms,” MacLean said in an Aug. 5 interview.

Inflation can emerge in certain sectors or countries, he said, and won’t affect all businesses the same way.

Companies with market-leading positions and pricing power will be in a better position to offset rising input costs by passing costs onto customers, he said. Just as important are strong profit margins, which allow companies to cushion any spike in costs.

Many companies are also leveraging technology for productivity gains that can offset higher costs elsewhere, such as wages. From a competitive standpoint, market-leading businesses could further distance themselves from smaller competitors in an inflationary environment.

“The financially weaker competitors, the mom-and-pops of this world, [are] in a far worse position to deal with any inflation, should it present itself,” said MacLean, whose firm manages the CIBC Global Growth ETF and the CIBC International Equity ETF.

He used the example of Laval, Que.-based convenience store operator Alimentation Couche-Tard. Mom-and-pop stores dominate the fragmented convenience-store industry, but they lack the means to offset cost inflation.

“They don’t have the systems in place to instigate widespread efficiency measures. Their only option is to raise prices, which can have a negative impact if you do it too aggressively,” MacLean said.

Couche-Tard, on the other hand, has the ability to leverage its scale and technology to offset most of the underlying cost pressure.

“As a bottom-up stock-picker that’s very, very important to remember,” he said.

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Mark Burgess

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Mark was the managing editor of Advisor.ca from 2017 to 2024.