Surging inflation is expected to be a serious bottleneck for India’s economy as the country battles the third wave of Covid-19 infections.
But many experts predict higher prices will stick around throughout 2022, contributing to a year of volatile markets. And that, of course, is making people a bit nervous.
Only about 40% of Americans say they’re confident in the U.S. economy, down from 69% before the pandemic, according to the 2022 Wealth & Wellness Index report released by Personal Capital.
But how do all these moving parts affect the average American’s investments and retirement savings? Seven financial planners tell Fortune that these are steps people can take to mitigate the effects of inflation on their investments.
Most investors believe inflation will be a major roadblock for markets in 2022 and are worried about how investments across their portfolios may get impacted. But there are ways to protect your hard-earned wealth from inflation’s negative effects.
Not all investments are negatively impacted by inflation. All you need to do is find the right strategies to mitigate the effects of inflation on your investments.
The consumer-price index, or CPI, rose 7% year over year in December, up from 6.8% in November. Inflation is running at the highest level since the early 1980s.
With inflation on the move, investors might want to look into the past to see what has worked in prior periods of soaring prices. Hartford Funds strategist Sean Markowicz recently found that five sectors tend to produce positive returns in inflationary times: utilities, real estate investment trusts, energy, consumer staples, and healthcare.
Analysts are favorites in sectors that traditionally offer protection from rising prices.
Alexandria Real Estate Equities
Alexandria Real Estate Equities (NYSE: ARE) is a major owner and operator of the lab and related office space in the thriving life-sciences research and development communities in markets such as Boston, San Diego, San Francisco, New York City, North Carolina’s Research Triangle, and Bethesda, Maryland.
Alexandria’s clients tend to be well-heeled, so they can pay the rent even as it rises. Income also will be rising in coming years as the company brings on about 25 million square feet of net rentable space in various stages of development. That will be on top of the 64 million square feet of income-generating space the REIT already has.
The ability to pass on rising costs is key to an operation’s ability to fight inflation. Net-lease retail REITs fit that bill particularly well by requiring the tenant to pay for taxes, insurance, and maintenance costs even as they rise. Combine that with a rock-solid list of tenants in essential businesses and a long record of consistently rising shareholder payouts, and you get Realty Income(NYSE:O) — one of the most solid members of the REIT world.
Realty Income has more than 650 tenants spread across its 11,000 or so properties throughout the U.S., with a sprinkling in the U.K. and Spain to boot. Its biggest clients include Dollar General, Dollar Tree-Family Dollar, 7-Eleven, Walgreens, and FedEx.
Investors in energy giant ConocoPhillips (NYSE: COP ) stock have enjoyed returns of about 75% since early 2021. In comparison the Dow Jones U.S. Oil & Gas Index is up about 52.4%.
On Jan. 5, shares of COP went over $78 intraday, closing at $75.65 to hover around multi-year highs. The current price supports a dividend yield of 1.11% representing a quarterly payout of 20 cents per share.
Meanwhile, both Brent and WTI crude oil prices have recovered from their recent declines triggered by questions regarding the global economic effects of the Omicron variant.
Oil company revenues and earnings tend to be linked to the price of oil. On Dec.2, OPEC+ decided to increase oil production. OPEC members, Russia and allies (known collectively as OPEC+) also sounded more optimistic about the potential effect of Omicron on global demand. As a result, oil prices have been on the rise.
During January, we expect COP stock to continue to trade sideways, possibly between $67.5 and $77.5. However, the early part of February could be volatile as investors digest quarterly metrics and any announcement that might come from OPEC+.
Analysts also have a 12-month median price target of $90.96 on the stock, implying an increase of about 20% from current levels. The 12-month price range currently stands between $65 and $117.
Sectors can defeat Inflation
REITs and energy can beat inflation because of, well, inflation. Prices for real estate and oil can rise along with the cost of everything else. Utilities, staples, and healthcare, meanwhile, are relatively indispensable. Demand in those sectors doesn’t drop off even if prices for electricity or breakfast cereal have to rise to allow companies to maintain their profit margins.
Those five areas seem like a sensible place to start in building an inflation-protected portfolio, but picking the best stocks in those sectors is another challenge. That is where Wall Street can help.
The Russell 1000 index of large capitalization stock was our universe to pick from. The 15 stocks, in no particular order, are included below. Consider them a starting point for further research rather than a fully developed portfolio.
REITs:Alexandria Real Estate Equities (ticker: ARE), Sun Communities (SUI), and Invitation Homes (INVH).
Energy:Cheniere Energy (LNG), Marathon Petroleum (MPC), and ConocoPhilips (COP).
Utilities:AES (AES), CenterPoint Energy (CNP), and NiSource (NI).
Consumer Staples:Spectrum Brands (SPB), Mondelez International (MDLZ), and Philip Morris International (PM).
Healthcare:Avantor (AVTR), Encompass Health (EHC), and Sotera Health (SHC).
Overall, about 90% of analysts covering the 15 companies rate the shares at Buy, while the average Buy-rating ratio for stocks in the Russell 1000 index is about 60%.
2022 PE Ratio
Alexandria Real Estate / ARE
Sun Communities / SUI
Spectrum Brands / SBP
Avantor / AVTR
Encompass Health / EHC
Invitation Homes / INVH
Cheniere / LNG
AES / AES
Marathon / MPC
ConocoPhillips / COP
Mondelez / MDLZ
NiSource / NI
Invitation Homes / INVH
Philip Morris / PM
Centerpoint / CNP
The average potential gain based on analysts’ target prices for the 15 stocks is about 20%. That is in line with the average for the Russell 1000, but the potential gains within the index vary widely by industry.
The 15 stocks have been performing well, with an average gain of about 27% over the past year. The Russell 1000 index is up about 20%. The S&P 500 and Dow Jones Industrial Average are up 23% and 16%, respectively.
Twelve of the 15 stocks are up over the past year. Encompass Health, Sotera and AES have dropped.
Of course, there is no certainty that stocks that did well in the past will continue to do so. There’s no guarantee that sectors that comfortably rode out prior periods of high inflation will do well this time. Still, the 15 are a good start for anyone seeking shelter.