Beware the inflation hangover

Inflation is being discussed daily, but how to combat it is less clearly understood; Abrie Pretorius explains why the Quality team believes there is a flaw in the traditional guidance to invest in capital-intensive, asset-rich companies.

3. Nov. 2021

4 minutes

Inflation is being discussed daily, but how to combat it is less clearly understood; Abrie Pretorius explains why the Quality team believes there is a flaw in the traditional guidance to invest in capital-intensive, asset-rich companies.

Navigating an inflationary environment

We believe the businesses that perform the best during inflationary environments are those that are capital-light and have low reinvestment requirements with assets dominated by intangible assets. Using two hypothetical examples, Abrie Pretorius illustrates how a capital-intensive company would produce substantially less cash flow than a comparable capital light business in an inflationary environment.

Dividends slumped in 2020, but the extent of this varied dramatically depending on the capital intensity of the industry; investing in the right sector is crucial. Ninety One’s Quality investment team does not believe this cycle will be materially different to prior periods, and therefore expect capital light businesses that do not require continuous reinvestment to continue to deliver attractive, sustainable, real dividend and free cash flow growth for shareholders.

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