As higher inflation is spreading across world markets, with China’s consumer price index hitting 6.4 per cent in June, investment professionals at Fidelity International are looking to adjust their portfolios to cope with the environment.  

Concerns about inflation manifest themselves in the price of "safe haven" asset, gold, which climbed above $1,600 per ounce for the first time recently. The yellow metal could be driven as high as $2,000 in the next year, according to Aberdeen Asset Management.

While stocking up on gold can be an effective bulwark against inflation, there are still gains to be made on the stock market. Experts from Fidelity International the UK-listed investment fund manager, pick companies with enough pricing power to thrive in these inflationary times.

Tobacco, big brands and industry

Sam Morse, portfolio manager for the Fidelity European Fund, mentions Swedish Match, producer of snuff, chewing tobacco, cigars, pipe tobacco, matches and lighters. As tobacco products are addictive, demand is largely independent of price.

“The primary driver of Swedish Match’s earnings is pricing, which remains strong due to the nature of the product and trend for industry consolidation, which is reducing competition,” says Morse. “As a result, cash generation is also strong, making for a strong ability to reward shareholders through dividends.”

Morse also highlights Nestle, the world’s largest food manufacturer with brands such as Kit Kat and Nescafe in its range, as a company with strong pricing power capable of growing earnings in times of higher inflation.

The luxury brand Burberry has a strong presence in China and other emerging markets where the rapidly growing middle class is increasing its desire for luxury goods. Aruna Karunathilake, portfolio manager for the Fidelity UK Aggressive Fund, thinks Burberry’s exclusive brand can pass on the effect of rising input costs to its customers via higher prices.

Additionally, Karunathilake favours BG Group, an energy exploration and production company that focuses on gas and liquefied natural gas. Demand for liquefied natural gas is strong thanks to growth in emerging economies and bias against nuclear power after the catastrophe in Japan. “Commodity companies such as BG tend to do well in times of rising inflation as these real assets keep their value in times of monetary debasement,” says Karunathilake.

Linde is a global engineering and industrial gases firm that builds chemical plants producing industrial gases and supplying a range of industrial, medical and specialty gases. Amit Lodha, portfolio manager for Fidelity’s Global Real Assets Fund, believes Linde is well positioned to capitalise on the dynamic trends in the emerging market economies and leverage the long-term trends of energy and climate change. “This is a company with pricing power as it has the ability to pass through higher costs through its contracts that it sets with its customers at different stages of the cycle,” says Lodha.

Finally, Lodha picks Iluka Resources, an Australian mining company that produces zircon and titanium, minerals used in a wide range of products, for example paints, plastics and tiles. The sector has had strong growth in demand and a supply deficit, which is thought to give Iluka leeway to raise prices.