Five stocks that could beat inflation

When inflation really took hold in 2022, it wasn’t immediately clear where the escape hatch was located. Not only were the inflationary shocks sharp, then dispersed and then self-reinforcing, but investors’ playbook had gathered dust after a generation of negligible official price rises. Precious metals, cash, commodities and even fixed income were all offered up as solutions. Equities, it was broadly (and initially correctly) assumed, would struggle as rising costs and uncertain demand sapped margins, and higher discount rates ate into capital values.

As is always the case in markets, it’s impossible to separate fair valuations from sentiment – even with hindsight. But what we can say is that equities have broadly recovered from their lows and risk appetites are improved – if tempered by a renewed awareness of the punishment inflation can inflict.

In the UK, the latest consumer price index (CPI) reading came in at 4.2 per cent, having peaked at 11.1 per cent in October 2022. Since that double-digit high, our Inflation Beaters screen is up 35 per cent, more than double the return from its benchmark index, the FTSE 350.

Because inflation is a trailing indicator, these returns were compensatory. In the year to October 2022, the screen posted a total loss of around 13 per cent, meaning capital values were worth around 22 per cent less in real sterling terms at that point. As a result, the screen’s 35 per cent total return since just about puts it above where it was in late 2021, if we factor in the inflation that has persisted since October 2022 (and exclude opportunity costs).

For this reason, we can debate whether the screen has done its job. Often in recent years, it has failed to preserve value, despite posting a handy 12.9 per cent total return in the year to 11 January 2024.

Such equivocation might seem harsh, nonetheless. While it is designed to find shares with a good chance of beating inflation, the screen does not try to anticipate inflation, and is therefore at the mercy of the macroeconomic winds, and the attendant shareholder reaction.

Its long-term record is also decent. All told, the screen has generated a headline total return of 182 per cent since we started running it in 2012, based on annual reshuffles of stocks that match its criteria. While our screens are always meant as a source of ideas rather than off-the-shelf portfolios, by factoring in notional annual costs of 1 per cent, the cumulative total return drops to 150 per cent. That’s still ahead of the FTSE 350, which is up 106 per cent including dividends over this time.

Thanks to its solid recent run, the screen’s claim to have beaten inflation over the long haul has strengthened, notwithstanding the nasty shocks of the past two years.

According to the Bank of England, £100-worth of goods and services in 2012 today cost a little over £137. If instead we use the Office for National Statistics’ retail price index (RPI), then the figure rises to £159, meaning just over half of the cumulative returns from the FTSE 350, and about a third of our screen’s headline gains, have been eroded by sterling’s debasement since its inception.

UK investors might go one further in their definition of inflation. Outpacing domestic RPI gets you some of the way, but it doesn’t entirely reflect the global purchasing power of that 2012 pound, which has declined by around a fifth against the dollar. However, even if we crudely clip a fifth of the screen’s headline return, it still spits out a 145 per cent total return. Factor in US inflation of around 33 per cent over this period, and £100 invested in the screen in 2012 would still have just about doubled in value in 2012 dollar terms.

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