Given the new news of COVID in China, and the ongoing impacts of the Russian invasion of Ukraine, the near term outlook for inflation is one of upside risk.

It just ain’t gonna unwind (supply chains de-bottleneck) if China closes, and if the military conflict continues.

So, to that end, we can think about what kinds of stocks and sectors are going to benefit from sustained higher inflation.

You can answer such a question quantitatively, by regressing each sector/industry group against market implied estimates of inflation (breakevens, derived from Aussie TIPS equivalents, and nominal AGBs).


Regression to breakevens

Unsurprisingly, banks, resources, and insurance all come to the top. Food and Beverage also has some degree of implied pricing power. Note that in this analysis we control for movements in FX, oil, real rates and changes in real rates.

Note also the proportion positive section. That’s a helpful guide (in addition to the t-stats and p-values, but I won’t get into that here) as to how “real” the result is. There’s kind of no doubt about the impacts here for those sectors.

The asset management and custody grouping is the fund managers and platforms. Regressions are noisy, and it is likely that the fund managers are picking up the correlates of “strong-economy-=-higher-expected-inflation” more so than it is about passthroughs to inelastic end users.


Regression to breakevens

At the stock level, things are even noisier. The gold stocks all have a material negative loading to BE’s, which is plausibly getting conflated with negative loadings to changes in real rates, which in turn is being effected by the recent positive correlation to both, given Russian stockpiling of gold (which bid up in the price) as a means of attempting to pre-empt sanctions.

So you’ve really got to think your way through the data.

The other approach is more qualitative. Which stocks, during reporting season, indicated strong pricing power?

Amcor and Brambles had well publicised pass-throughs to end users. Many, but not all, of the consumer discretionary names did too. JBH in consumer electronics is another good example, as were some of the private health insurance players.

In our view, the retail names are challenged by the share of wallet shift (pull forward in demand, due to COVID, which now leaves a hollow log + higher mortgage rates, higher gas prices) leading to inventory overhangs and increased competition. Plausible, these are deflationary candidates.

The sectors that we already discussed (banks, resources, insurance) similarly had good outcomes, with QBE and SUN reporting some of the strongest gross written premium growth we’ve seen in many years.

In the current environment, the resource companies are the source of much of the inflation – iron ore, oil, copper, steel, and so we probably don’t need to discuss them here in detail.

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