Why the market is turning to Quality: managing inflation risk

The Ninety One Quality team discuss some of the key attributes they look for in periods of inflationary pressure.

Nov 12, 2021

2 minutes

Neil Finlay

Inflation is rising in most economies. Whilst the causes and remedies are widely debated, the prospect of an, albeit modest, rise in rates seems inevitable.

We believe the Quality companies we seek have the attractive attributes to make them suitable for inflationary periods.

Quality companies graphic

1. Enduring competitive advantages

Companies with high barriers to entry, often leads to pricing power and high gross margins, which help mitigate rising input prices.

Figure 1: Superior gross margins*

Graph: Superior gross margins

2. Strong balance sheets

Companies less impacted by higher financing costs as rates rise.

Figure 2: Lower levels of leverage*

Graph: Lower levels of leverage

3. Lower capital intensity

Companies less impacted by capital expenditure and fixed cost inflation.

Figure 3: Lower capital expenditure (capex) as % of sales*

Graph: Lower capital expenditure (capex) as % of sales

4. Attractive valuations

Companies less exposed to higher discount rates which will likely impact growth stocks whose valuations are dependent on longer term cash flows.

Figure 4: Superior quality at market-average valuations*

Graph: Superior quality at market-average valuations

Neil Finlay, Investment Director, expands on this view in a short video.

Download the key messages

Past performance is not a reliable indicator of future results, losses may be made. Source: Ninety One and FactSet, 30 September 2021. Re-weighted excluding cash and equivalents showing metrics of the constituent companies, since inception. *Metrics shown are for Ninety One’s flagship Quality strategy: Global Franchise. Based on a pooled vehicle within the strategy as these metrics are not available at the composite level. 1. MSCI All Country World excludes banks from free cashflow yield calculation, classified in the Banks Industry Group according to GICS. For further information on indices, please see the Important Information section.

Specific risks
Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Derivatives: The use of derivatives is not intended to increase the overall level of risk. However, the use of derivatives may still lead to large changes in value and includes the potential for large financial loss. A counterparty to a derivative transaction may fail to meet its obligations which may also lead to a financial loss. Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company. Concentrated portfolio: The portfolio invests in a relatively small number of individual holdings. This may mean wider fluctuations in value than more broadly invested portfolios. Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.

General risks
All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.

Authored by

Neil Finlay
Investment Director, Quality

Important Information

This communication is provided for general information only should not be construed as advice.

All the information in is believed to be reliable but may be inaccurate or incomplete. The views are those of the contributor at the time of publication and do not necessary reflect those of Ninety One.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.

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