(BFM Bourse) – The rise in prices is stronger and more durable than expected. The cost of living is increasing month by month while growth is showing signs of weakness. The combination of these two phenomena raises the specter of the portmanteau “stagflation” combining inflation and stagnation of the economy. In this context, which stocks could get through this inflationary turbulence without too much damage?
The French economy should go through a difficult period, admits the Minister of the Economy Bruno Le Maire. The latter stressed in early May that France was “facing considerable economic difficulties.” Prices continued to rise in April, at +4.8% over one year, after +3.6% in February and +4.5% in March. Inflation should continue to accelerate and could reach 5.4% over one year in June. Besides, French economic growth is at a standstill, and is expected to rise slightly by 0.25% in the second quarter.
In the United States, inflation is also at the heart of all concerns and in particular of the American Federal Reserve. In March, it accelerated to 8.5% year on year, a level not seen in 40 years, according to data from the Bureau of Labor Statistics. In April, inflation fell very slightly to 8.3% over one year. While the rise in prices remains stronger and longer than expected, the Fed has just initiated a monetary tightening in an attempt to regulate a galloping rise in prices, accentuated with the Ukrainian conflict. Because faced with rising inflation, central banks end up raising interest rates with the risk of putting a real halt to already sluggish growth.
All the elements are in place to see the risk of “stagflation” settling in the world economies. The portmanteau word “stagflation” – contraction of the terms “stagnation” and “inflation” – smells good of the 1970s when the oil shocks caused a surge in prices and widened the first budget deficits.
The first traces of the term “stagflation” appear in the 1960s, well before the first oil shock of 1973. On November 17, 1965, Iain Macleod MP of the British Conservative Party was the first to utter the word “stagflation” to describe the economic situation across the Channel. “We now have the worst of both worlds: not just inflation on one side or stagnation on the other, but both at the same time. We have a sort of ‘stagflation’ situation, he said in the House of Commons.
“Pricing power” values, anti-stagflation shield but…
In such a context, companies are not all housed in the same boat. Inflation is increasingly becoming a discriminating factor for listed companies. Two choices are imposed on them: either they bear the full brunt of the rise in prices with the risk of seeing their margins cut, or they are able to set their prices and impose them on their customers without this affecting Requirement. These companies have a power that is not magic, but “pricing power”.
Stocks in the luxury sector are the champions in this area, with price being an effective lever for maintaining the desirability of the products sold. The more expensive the coin, the higher its power of attractiveness. Companies in this sector, particularly in France, have built their reputation on this premise. LVMH, Hermès and Kering historically have strong pricing power. With one nuance, this sector is very exposed to China and therefore to a tightening of the local authorities on the consumption of high-end products as well as to health restrictions in the country. Moreover, the stock market performances of LVMH (-21.90%), Kering (-36%) and Hermès (-32%) since the start of the year bear witness to the strong weight of the Chinese economy in their activity. .
Essential tech brands like Apple or Microsoft regularly manage to increase their prices. The latter is also a marketing argument for the apple brand. UBS analysts ranked Apple among the 10 US listed companies that currently have the most pricing power. However, the group is not immune to falling markets. Like other technology stocks, the apple brand is sensitive to interest rate tightening. Since its record of January 3, the capitalization of Apple has melted by nearly 700 billion dollars, losing its crown of king of world capitalizations to the benefit of Aramco, the Saudi oil giant!
The revenge of industrial stocks
The power of “pricing power” is not specific to the luxury sector, nor to tech since many industrial stocks follow this same mechanism to preserve their margins. The glass packaging specialist Verallia was able to increase its own prices by 10% without losing its customers. Since its last (excellent) quarterly publication, the title of the European leader and the world’s third largest producer of glass packaging for beverages and food products has taken its revenge with a gain of 15% on the stock market.
However, the case comes a long way, the group concentrated the concerns of investors while it is a major consumer of raw materials (gas, electricity, glass sand). Its usual bill represents almost 20% of turnover, enough to fuel fears about the glassmaker.
Little known to the general public, SergeFerrari Group is also a master in the art of “pricing power.” The company, which produces composite fabrics for light architecture, published a very good first quarter. Under the effect of a rise in selling prices, the Dauphinois group has the luxury of raising its annual target and thus aiming for double-digit growth this year.
We can also mention Rexel, whose price effect did not in any way dampen the customers of the distributor specializing in energy-related products and services at the start of the year. Better still for Rexel, the ongoing tensions in the supply chain are an opportunity for the group to continue “to help its customers deal with product shortages and labor availability, enabling them to increase their operational efficiency”, underlines the group. Its order books are also increasing in the main countries due to sustained demand. Moreover, the group’s recent progress on the stock market places Rexel as a potential candidate for entry into the CAC 40, of which it recently joined the antechamber, the Next 20.
The French-speaking chemical players Solvay and Arkema have also been clever at integrating cost increases into their selling prices. On the occasion of its quarterly update at the beginning of May, Arkema announced a price effect of +31.5% (!), which reflects, according to the group, its ability “to pass on in the selling prices of its specialty materials the very strong inflation of raw materials, energy and transport, as well as the best conditions in acrylic upstream”.
This salvo of periodical publications placed under the sign of inflation gives a first indication on the ability of companies to impose price increases on their customers without losing them. But the “pricing power” is not everything, the market environment can play spoilsport like Apple or luxury values to name a few…
Sabrina Sadgui
©2022 BFM Bourse