Stocks that are Inflation-Resistant

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The country’s inflation rate jumped to 4% in March from only 3% in the previous month — ahead of the Bangko Sentral ng Pilipinas’ (BSP) forecast of 3.7% and on the top-end of BSP’s expected range of 3.3 to 4.1%.

The increase was largely due to the geopolitical tensions between Russia and Ukraine that sent oil and commodity prices soaring. This brings the PHL’s year-to-date average inflation to 3.4%. The BSP expects average full year 2022 inflation to breach the upper end of the 2-4% target range.

Analysis and Recommendation

Rising inflation continues to be a serious concern for Philippine stocks as it could stifle consumer spending (which was already on the rise following increased mobility) and squeeze profit margins. Therefore, stock picking strategy should revolve around names and industries that are resilient to near-term inflation headwinds. Here are our picks.

Our first pick – the banking sector

Inflation pressures should continue to push the BSP to raise benchmark rates. According to the Mistubishi UFJ Group (MUFG), the BSP is targeting to raise benchmark rates by a total of 75 basis points (bps) or 0.75% by the 2nd half (2H) of 2022. Higher benchmark rates, coupled with sustained loan demand, should be favorable to the banking industry.

As per management of the top 3 banks in the Philippines, a 25 bps (0.25%) rate hike translates to higher profit margins of MBT (additional 10-15 bps), BDO (additional 6-7 bps) and BPI (additional 10 bps). It may be a good time to accumulate these banking stocks as rate hikes are expected in the latter half of 2022.

Other resilient sectors include power and utilities

As we expect demand to remain consistent despite higher input costs, power and utilities stocks could remain resilient. While consumer stocks may face near-term inflation headwinds, correction may present an opportune time to buy resilient names within these sectors.

Our consumer sector picks – RRHI, PGOLD, and URC

Both RRHI (through Rustans Supercenters) and PGOLD (through S&R) continue to grow their customer base within the A, B, and Upper C classes who are less sensitive to price increases.

For URC, while inflation will weigh down on earnings in the near-term, our long-term view is that URC will continue to maintain strong fundamentals with a highly diversified portfolio of branded consumer products where it is either a market leader or a strong contender.

While rising inflation is worrisome, a revised stock picking strategy can certainly help investors hedge against inflation woes.

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