5 Sectors that Could Benefit or Suffer from Inflation
For many investors, inflation has overtaken COVID as the largest threat to markets.1 While it is up for debate how high and for how long prices may rise, we expect inflation worries to persist at least through the near term as stimulus, commodity prices and reopening feed through. Inflation is likely to be stronger in the US, which is facing rapid economic recovery, than in parts of the world that face output gaps. Here we consider which sectors stand to gain – or lose – the most if inflationary pressures pick up.
Given the impact of eroding pricing power, spending (retail or capex) may be pulled forward but benefits for some will be negated by higher input costs. The net result by sector is determined by a combination of factors such as elasticity of demand or availability of product. Another major consideration is the impact of higher interest rates, which often accompany inflationary pressures, and have their own divergent consequences on sectors. Recently, we have seen bond yields increase but major central banks look far from tightening behaviour.
Overall, cyclical sectors tend to outperform defensive ones during periods of rising inflation. Figure 1 shows the sensitivity of sectors to inflationary expectations over the last three years (admittedly a low inflation period). This data features in the SPDR Sector Compass every quarter.
Inflation Sensitivity of MSCI World Sectors (Past 3 Years)
Source: Bloomberg Finance L.P., as of 31 March 2021. Data is for MSCI World NTR USD Indices. Inflation measure taken from USD Inflation Swap Forward 5Yr-5Yr.
Below we consider the varied impact of rising prices on five sectors: three where inflation could have a positive impact and two that may suffer.
Materials: A Sector Play for the Commodity Supercycle
Commodities, including all types of metals, oil and soft agricultural products, have seen a strong start to 2021 and are one cause of higher inflation expectations. Prices are responding to both the demand-pull drivers of economic reopening and the supply-push impact of COVID-related disruption.
We believe mining companies are well placed in the current cycle to pass on higher industrial metal prices to their customers. Even though price increases often stimulate new supply within this industry, permissioning and building of new mines can take years so current demand-supply dynamics could persist.
Chemical manufacturers and building product producers are facing similar beneficial demand and supply trends, although there will be cost pressures from labour and raw material costs.
Energy: Highest Inflation Beta
The rise in crude oil prices of almost 25% year to date is feeding through to high levels of fuel inflation across developed and emerging markets. The Energy sector has a high sensitivity to this rise. The correlation of 0.6 between the S&P 500 Energy and inflation over the last 10 years is three times the average for US equities.2 There is a direct linkage through oil and gas prices, which are a core but volatile component of CPI figures, and Energy stocks, which have a strong relationship with crude oil futures. For every 1% rise in CPI, S&P 500 Energy prices move 9% (over last 10 years).3
The ability of Energy companies to pass on higher prices varies by industry but overall the benefit can be seen in the large earnings upgrades of recent months. Looking ahead, the current demand-supply balance could weaken with any deterioration in the OPEC+ agreement to restrain production and the return of fracking at higher price levels.
While the Energy sector has the highest inflation beta, it does suffer from a high level of volatility, which hurts risk-adjusted returns over the longer term.
Industrials: Reopening and Stimulus Beneficiary
The Industrials sector is a diverse grouping, including aerospace manufacturers, electrical engineering, transportation providers and consultancies, so is not easy to generalize. However, the sector traditionally benefits from cyclical trends at this stage of economic recovery. Possible drivers this year include a return of capital expenditure, continued modernisation of manufacturing processes and new orders as a consequence of fiscal stimulus packages.
The price components of the latest US PMI figures signal intensifying inflationary pressures, with manufacturers suffering from input price increases, close to four-year highs, as well as benefiting from the output price measure at its highest level since January 2017. Again, it is important to watch the ability of different industries in passing on cost increases.
Industrials is an appropriate cyclicals choice for high inflation beta with the potential of avoiding high volatility.
Utilities: Limited Pricing Power
Utility companies have a complicated relationship with inflation. Currently, electricity, gas and water suppliers face higher input costs from commodities such as coal and natural gas, which could impact profit margins. Utilities have limited pricing power given a significant part of their revenue streams is regulated.
Local country or state regulators oversee prices, production and environment in return for granting monopoly power. These commissions set prices to allow utility providers to earn a specified return on capital from their activity. If costs for these companies rise due to inflation, they will usually be allowed rate increases to pass on to customers through network tariffs. However, depending on the regulatory agreement, higher costs may not be recoverable until the next regulatory cycle.
An estimated 60% of global sector earnings is derived from inflation-hedged regulated assets, giving some protection, but it varies by region and activity.4 Electricity generation and supply are largely deregulated (i.e. profit is exposed to market prices), whereas transmission and distribution tend to operate under regulated frameworks and can claim to recover inflation over time. Thus integrated utilities, which comprise much of the sector, do not necessarily have a high degree of inflation protection.
Consumer Staples: Price-Sensitive Consumers and Heavy Competition
The Consumer Staples sector contains food retailers, food and beverage producers, and household and personal good suppliers. These companies are relatively defensive because of the relative inelasticity of demand for the goods they provide, but they do suffer from low barriers to entry. The amount of competition, as well as heavy commoditisation of product and own labeling, mean companies often struggle to pass on costs unless they own leading brands or a unique offering. Profit margins are under constant pressure, which can intensify during inflationary periods.
Changes to the supply chain brought about by the pandemic have been unhelpful, and may force sourcing to change in the future. Also, the desire to produce more sustainably often raises production costs. However, there are some positive longer-term trends, including premiumisation and better awareness of health and wellness, which could see product pricing rise.
Recent data shows very little food price inflation and small increases ahead of the seasonal average for household goods.5 At the same time, input costs across the sector are facing commodity price pressures and distribution costs.
Source: Bloomberg Finance L.P., for the period 8- 15 April 2021. Flows are as of date indicated and should not be relied upon as current thereafter. This information should not be considered a recommendation to invest in a particular sector or to buy or sell any security shown. It is not known whether the sectors or securities shown will be profitable in the future.
1According to the March 2021 Bank of America Fund Manager Survey, inflation has become the main investor tail risk fear, replacing COVID-19, which had been the primary worry for the previous year.
2Source: S&P Dow Jones Indices March 2021.
3Source: S&P Dow Jones Indices March 2021.
4Source: Citi Research, January 2021.
5Source: PriceStats®, State Street Global Markets, as of 29 March 2021.
General Access. For professional investor use only.
France: State Street Global Advisors Ireland Limited, Paris branch is a branch of State Street Global Advisors Ireland Limited, registered in Ireland with company number 145221, authorised and regulated by the Central Bank of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. State Street Global Advisors Ireland Limited, Paris Branch, is registered in France with company number RCS Nanterre 832 734 602 and whose office is at Immeuble Défense Plaza, 23-25 rue Delarivière-Lefoullon, 92064 Paris La Défense Cedex, France. T: (+33) 1 44 45 40 00. F: (+33) 1 44 45 41 92.
Germany: State Street Global Advisors GmbH, Brienner Strasse 59, D-80333 Munich. Authorised and regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht (“BaFin”). Registered with the Register of Commerce Munich HRB 121381. T: +49 (0)89-55878-400. F: +49 (0)89-55878-440.
Israel: No action has been taken or will be taken in Israel that would permit a public offering of the Securities or distribution of this sales brochure to the public in Israel. This sales brochure has not been approved by the Israel Securities Authority (the ‘ISA’). Accordingly, the Securities shall only be sold in Israel to an investor of the type listed in the First Schedule to the Israeli Securities Law, 1978, which has confirmed in writing that it falls within one of the categories listed therein (accompanied by external confirmation where this is required under ISA guidelines), that it is aware of the implications of being considered such an investor and consents thereto, and further that the Securities are being purchased for its own account and not for the purpose of re-sale or distribution. This sales brochure may not be reproduced or used for any other purpose, nor be furnished to any other person other than those to whom copies have been sent. Nothing in this sales brochure should be considered investment advice or investment marketing as defined in the Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 1995 (“the Investment Advice Law”). Investors are encouraged to seek competent investment advice from a locally licensed investment advisor prior to making any investment. State Street is not licensed under the Investment Advice Law, nor does it carry the insurance as required of a licensee thereunder. This sales brochure does not constitute an offer to sell or solicitation of an offer to buy any securities other than the Securities offered hereby, nor does it constitute an offer to sell to or solicitation of an offer to buy from any person or persons in any state or other jurisdiction in which such offer or solicitation would be unlawful, or in which the person making such offer or solicitation is not qualified to do so, or to a person or persons to whom it is unlawful to make such offer or solicitation. Investing involves risk including the risk of loss of principal. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent. The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.
Ireland: State Street Global Advisors Ireland Limited is regulated by the Central Bank of Ireland. Registered office address 78 Sir John Rogerson’s Quay, Dublin 2. Registered Number: 145221. T: +353 (0)1 776 3000. F: +353 (0)1 776 3300.
Italy: State Street Global Advisors Ireland Limited, Milan Branch (Sede Secondaria di Milano) is a branch of State Street Global Advisors Ireland Limited, registered in Ireland with company number 145221, authorised and regulated by the Central Bank of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. State Street Global Advisors Ireland Limited, Milan Branch (Sede Secondaria di Milano), is registered in Italy with company number 10495250960 - R.E.A. 2535585 and VAT number 10495250960 and whose office is at Via Ferrante Aporti, 10 - 20125 Milano, Italy. Telephone: +39 02 32066 100. Facsimile: +39 02 32066 155.
Netherlands: State Street Global Advisors Netherlands, Apollo Building, 7th floor Herikerbergweg 29 1101 CN Amsterdam, Netherlands. Telephone: 31 20 7181701. SSGA Netherlands is a branch office of State Street Global Advisors Ireland Limited, registered in Ireland with company number 145221, authorised and regulated by the Central Bank of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin 2.
Switzerland: State Street Global Advisors AG, Beethovenstr. 19, CH-8027 Zurich. Authorised and regulated by the Eidgenössische Finanzmarktaufsicht (“FINMA”). Registered with the Register of Commerce Zurich CHE-105.078.458. T: +41 (0)44 245 70 00. F: +41 (0)44 245 70 16.
United Kingdom: State Street Global Advisors Limited. Authorised and regulated by the Financial Conduct Authority. Registered in England. Registered No. 2509928. VAT No. 5776591 81. Registered office: 20 Churchill Place, Canary Wharf, London, E14 5HJ. T: 020 3395 6000. F: 020 3395 6350.
Standard & Poor’s, S&P and SPDR are registered trademarks of Standard & Poor’s Financial Services LLC (S&P); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain purposes by State Street Corporation. State Street Corporation’s financial products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index.
All forms of investments carry risks, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.
This document contains certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Issuing Office: This document has been issued by State Street Global Advisors Ireland (“SSGA”), regulated by the Central Bank of Ireland. Registered office address 78 Sir John Rogerson’s Quay, Dublin 2. Registerednumber 145221. T: +353 (0)1 776 3000. Fax: +353 (0)1 776 3300. Web: ssga.com.
The views expressed in this material are the views of SPDR EMEA Strategy & Research through the period ending 9 April 2021 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
ETFs trade like stocks, are subject to investment risk and will fluctuate in market value. The investment return and principal value of an investment will fluctuate in value, so that when shares are sold or redeemed, they may be worth more or less than when they were purchased. Although shares may be bought or sold on an exchange through any brokerage account, shares are not individually redeemable from the fund. Investors may acquire shares and tender them for redemption through the fund in large aggregations known as “creation units.” Please see the fund’s prospectus for more details.
Past Performance is not a guarantee of future results.
SPDR ETFs is the exchange traded funds (“ETF”) platform of State Street Global Advisors and is comprised of funds that have been authorised by Central Bank of Ireland as open-ended UCITS investment companies.
The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU). This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.
ETF's worden verhandeld zoals aandelen, zijn onderhevig aan beleggingsrisico, fluctueren in marktwaarde en kunnen worden verhandeld tegen prijzen boven of onder de netto-inventariswaarde van de ETF’s. Brokercommissies en kosten van de ETF zullen het rendement verminderen. De wijzigingen in wisselkoersen kunnen een nadelig effect hebben op de waarde, prijs of inkomsten van een belegging. Verder is er geen garantie dat een ETF zijn beleggingsdoelstellingen zal behalen.
DE SPDR-ETF'S VAN SSGA ZIJN MOGELIJK NIET BESCHIKBAAR OF GESCHIKT VOOR U. DE UITGEDRUKTE MENINGEN/INFORMATIE OP DEZE SITE VORMEN GEEN BELEGGINGSADVIES, FINANCIEEL, JURIDISCH, REGLEMENTAIR, BOEKHOUDKUNDIG OF BELASTINGADVIES. BIJ TWIJFEL DIENT MEN STEEDS ONAFHANKELIJK ADVIES IN TE WINNEN. DE INFORMATIE NOCH ENIGE OPINIE OP DEZE SITE VORMT EEN VERZOEK OF AANBOD VOOR DE AAN- OF VERKOOP VAN AANDELEN VAN DE FONDSEN OF ENIG ANDER FINANCIEEL INSTRUMENT.Standard & Poor’s®, S&P® en SPDR® zijn gedeponeerde handelsmerken van Standard & Poor's Financial Services LLC (S&P); Dow Jones is een gedeponeerd handelsmerk van Dow Jones Trademark Holdings LLC (Dow Jones); en deze handelsmerken zijn in licentie gegeven voor gebruik door S&P Dow Jones Indices LLC (SPDJI) en in sublicentie voor bepaalde doeleinden door State Street Corporation. De financiële producten van State Street Corporation worden niet gesponsord, bekrachtigd, verkocht of gepromoot door SPDJI, Dow Jones, S&P, hun respectieve filialen en externe licentiegevers, en geen van deze partijen doen enige verklaring over de raadzaamheid om te beleggen in dergelijke producten, noch aanvaarden zij enige aansprakelijkheid in verband hiermee, inclusief voor fouten, weglatingen of onderbrekingen van een index.
SPDR-ETF's mogen enkel worden aangeboden en verkocht in rechtsgebieden waar dat is toegelaten in overeenstemming met de geldende regels.
Informatie met betrekking tot Mexico
Deze informatie is geen marketing of aanbieding van effecten en is niet ook niet zo bedoeld, en mag bijgevolg niet als dusdanig worden opgevat. De fondsen waarnaar in dit document wordt verwezen, zijn niet en zullen niet worden geregistreerd onder de Mexicaanse wet op de effectenmarkten (Ley del Mercado de Valores) en mogen in Mexico niet aan het publiek worden aangeboden of verkocht. De documentatie met bekendmakingen in verband met een van de bovengenoemde fondsen mag niet openbaar worden verspreid in Mexico en aandelen van de fondsen mogen niet worden verhandeld in Mexico.
SSGA SPDR ETFs Europe I Plc en SSGA SPDR ETFs Europe II Plc zijn beleggingsmaatschappijen met variabel kapitaal opgericht als fondsen met afzonderlijke aansprakelijkheid tussen de compartimenten volgens de wetten van Ierland en erkend door de Central Bank of Ireland conform de Europese verordening van 2011 over instellingen voor collectieve belegging in effecten. U moet het prospectus en de essentiële beleggersinformatie (KIID) met betrekking tot specifieke SPDR-ETF's aanvragen en zorgvuldig lezen alvorens u belegt. Voor meer informatie en het prospectus/KIID met de kenmerken, kosten en risico's van SPDR-ETF's kunt u nu een prospectus of KIID downloaden, of kunt u deze documenten verkrijgen bij uw financieel adviseur of bij uw lokale SSGA-kantoor.
De in de VS gevestigde SPDR-ETF's die op deze site worden vermeld, zijn enkel toegelaten voor commercialisering in het relevante EER-rechtsgebied conform artikel 42 van de AIFMD (zoals omgezet in nationaal recht van die lidstaat); of kunnen anderszins rechtmatig worden aangeboden of verkocht (inclusief op basis van een verzoek van een professionele/gekwalificeerde belegger). Enkele in de VS gedomicilieerde SPDR-ETF's die op deze site worden vermeld, zijn alternatieve beleggingsinstellingen in de zin van de richtlijn van de Europese Unie inzake beheerders van alternatieve beleggingsinstellingen (Richtlijn 2011/61/EU) (“AIFMD”). SSGA Funds Management, Inc. en State Street Global Advisors Trust Company zijn de beheerders van alternatieve beleggingsinstellingen (“BAB's”) van deze fondsen.
Alvorens u belegt, moet u de beleggingsdoelstellingen, risico's, vergoedingen en kosten van de fondsen in overweging nemen. Een prospectus met deze en andere informatie kunt u downloaden of aanvragen bij uw financieel adviseur. Lees het zorgvuldig alvorens te beleggen.
SPDR® Dow Jones® Industrial Average ETF staat genoteerd en is geregistreerd voor verkoop in Nederland.