Get inflationary investment back on track

As a child in the 1960s and 1970s, I remember my mother staring at her purse, worrying about how she could increase her family income to cope inflation. She has an encyclopedic knowledge of supermarket prices, which stems from years of savings.

The worst moment was in 1975, when the inflation rate reached 24.2%. For most of the past 25 years, it has hovered around 2%.For many who find double-digit increases in energy costs and gasoline pumps, this new period of inflation may be Shock.

The factors driving it have changed in the past six months. In the spring, prices were compared with the prices at the height of the first lockdown a year ago. If the price, for example, Second-hand car Significantly higher. During the blockade, a car, whether used or not, has no value.

Recently, price increases seem to be the result of scarcity as the company struggles to keep up with the pace of recovery.s story Port blocking with Shortage of drivers Is global. There is no doubt that some of these obstacles will begin to clear, but others seem likely to persist.

Another important factor is Wage inflationIn the past few years, most of us are very happy to work, so there is little pressure to raise pay. Now is the time to catch up.

Covid-19 has caused many people to re-examine whether they really need this low-paying job. Suddenly, many major employers have to drastically increase their wages to attract and retain workers. Inflation, whether it comes from wages, fuel, or raw materials, will reduce a company’s profit margins, especially in the absence of economic prosperity.

How will this affect your choice of equity? Some industries, such as hotels and entertainment, are recovering, but rising labor and energy costs are squeezing profit margins. The stock prices of many companies in these industries have been flat.

The reputation of other sectors in dealing with inflation may be exaggerated. For example, manufacturers of popular consumer goods often insist that their brands are strong enough to pass on any inflationary costs at higher prices. The evidence shows that this is not always the case.

take Beiersdorf, Which makes Nivea cosmetics. According to a Bloomberg report, analysts expect its operating margin (sales minus the cost of manufacturing and selling goods) to drop from 15% in 2019 to around 12.8% this year. A small drop in operating profit margin may have a major impact on the income left to shareholders after interest and taxes are deducted-Beiersdorf’s net profit margin has dropped from 10% of sales to about 9%.

This explains to a certain extent why the stock has lags behind the global stock index by 25% in the past year. UnileverCompanies that produce Dove soap, Haagen-Dazs ice cream and many other well-known consumer brands are in a similar situation.

In contrast, L’OrealIt is one of our favorite products and seems to be able to pass on higher costs because their customers are prepared to pay more for their favorite perfumes and cosmetics. The net profit margin is stable at 15.5%. Despite concerns about the decline in demand from Asian consumers, the stock has outperformed the index in the past year.

The list of companies claiming to have “pricing power” is unrealistic. It’s time to question these numbers, examine the costs carefully, and think more creatively. When my mother worried about how she would pay the rising grocery bill, I was happily distracted, watching Western TV, Casey Jones.

Casey is an engineer for the Midwest and Central Railway Cannonball Express. He has a very stressful job. Being taken hostage by mail robbers, frustrating thieves looking for gold bullion, and defending Apaches are all a day’s work (though I don’t remember him asking for a raise).

American Railways still diverts my attention today. The system there is very different from that in the UK. Outside the commuter areas of big cities, the main business of railways is to carry goods, not people.

There are about 700 companies in the United States, but most of them are small (as far as the true Midwest Central Railway is concerned, this is a narrow-gauge heritage line). We hold the two largest shares — Norfolk South and Union Pacific — each spanning more than 20 states, covering more than 30,000 miles of orbit, and benefiting from the domestic economic recovery in the United States.

Union Pacific announced its third-quarter results last month, reporting operating income of US$5.6 billion, an increase of 13%. That is, revenue before cost is not considered. Rising fuel costs dragged down the company, but the company still managed to achieve a 20% increase in operating income (profit after deducting costs). This is an example of a company that managed to pass on rising costs.

It is also a way to reduce costs. In recent years, America’s best railroad companies have been investing in technology. Today, high-tech precision dispatch enables railways to run longer and heavier trains — and safer. Union Pacific said that in the past year, its average maximum train length has increased by 4% to 9,359 feet. You may need to re-read the sentence. Yes, its length is 1.77 miles.

This may not keep frustrated drivers stuck at railroad crossings waiting for them to pass, but longer trains help reduce the industry’s carbon footprint. Nearly half of the long-distance freight in the United States is transported by rail, but it generates less than one-tenth of the carbon emissions of freight. Both Union Pacific and Norfolk Southern stated that they use a gallon of diesel to transport a ton of cargo for 444 miles.

The industry continues to invest to improve its sustainability. Help protect the environment and protect investors from the effects of inflation. I believe Casey Jones will be happy to hear it.

Simon Edelsten is the co-manager of Mid Wynd International Investment Trust and Artemis Global Select Fund

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