High levels of inflation increase uncertainty for both consumers and businesses. High inflation is particularly damaging for holders of long-term bonds. This is because the return of the bond is locked in at the time of purchase and a sustained increase in inflation will result in the real (inflation adjusted) returns declining. Equity holders are generally in a better position because businesses have some potential to lift the prices they charge customers to help protect the real value of their revenue streams. However, there will be many businesses that cannot pass on the cost of inflation and maintain their revenue in real terms.
If our views on inflation turnout to be incorrect, then we believe that allocating capital to high quality businesses that have pricing power and high levels of structural growth will help protect against sustained high inflation levels. Most businesses operate in a competitive industry structure and do not have the value proposition to sustainably increase (relative) prices to consumers. This means the average company’s real earnings power will decline relative to our portfolios.
During our webinar, Hyperion Asset Management’s Mark Arnold and Jason Orthman discussed a wide range of issues including:
- Our short- and long-term outlooks for inflation and interest rates
- Why sustained changes in bond yields and discount rates have a one-off impact on valuations
- Whether growth stocks are overvalued from the recent surge in inflation and long-term interest rates
- The additional structural headwinds impacting companies globally
- How Hyperion identifies modern businesses with strong value propositions that can grow revenues and profits organically, regardless of changes in inflation
- Examples of companies with strong pricing power in an inflationary environment
You can download the accompanying slides here and transcript here.
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