Quality investing during inflationary times

There are three core characteristics that insulate quality businesses from the damage inflation can bring: pricing power, low capital intensity, and healthy balance sheets. Clyde Rossouw explains why each attribute is such a powerful asset for companies to possess.

Feb 28, 2022

5 minutes

Clyde Rossouw
There are three core characteristics that insulate quality businesses from the damage inflation can bring: pricing power, low capital intensity, and healthy balance sheets. Clyde Rossouw explains why each attribute is such a powerful asset for companies to possess.
Three core characteristics

Concerns around inflation have dominated investor conversations across the globe throughout 2021, and look set to do so into 2022. However, we believe there are three core characteristics that insulate quality businesses from the damage inflation can bring: pricing power, low capital intensity and healthy balance sheets.

Pricing power – an attribute achieved through enduring competitive advantages building significant barriers to entry – ensures quality companies can sustain their healthy profit levels, as illustrated below.

Figure 1: Global Franchise has consistently delivered higher levels of profitability than the broader market

Past performance is not a reliable indicator of future results, losses may be made.
Source: Ninety One and FactSet, 30 September 2021. Global Franchise Fund a sub-fund of Ninety One Global Strategy Fund. Re-weighted excluding cash and equivalents showing metrics of the constituent companies since inception. Benchmark is the MSCI ACWI.

Capital light businesses will be much less impacted by inflation in required capital expenditure costs than capital intensive businesses. Further, having healthy balance sheets – with low levels of debt – puts quality companies in an enviable position of strength should interest rates rise.

We believe such businesses are well set to compound shareholder wealth in real terms irrespective of the macro environment and will continue to do so if prices do rise for a prolonged period.

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Authored by

Clyde Rossouw
Co-Head of Quality

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