Inflation has been the key theme for investors over the past 18 months or so, with markets adapting to a world where central banks have hiked interest rates at a rapid pace to stem the tide of rising prices. This has had a profound impact on consumers, who are suffering through a cost-of-living crisis.
However, this has not always been the case. Indeed, betting on consumer spending has been an incredibly profitable trade over the past decade, as highlighted by our research of the best and worst global funds during up and down markets, where several consumer specialist portfolios appeared at the top of the charts.
The trade is by no means over, but investors should be more selective about which companies they back to come through this period of economic turmoil.
Below, Mark Nelson, senior equity analyst at Killik & Co, shares his top companies that are demonstrating resilience at this challenging time.
Diageo
Drinks maker Diageo is behind some of the world’s leading brands of alcoholic beverages, counting Johnnie Walker, Guinness, Tanqueray and Smirnoff among its 200 brands.
Shares are down 13.8% over the past year as investors have worried the company could struggle at a time when consumers are feeling the pinch as alcohol sales are likely to be impacted by fluctuations in economic conditions. But Nelson said there are a number of reasons the business is more resilient.
Total return of Diageo vs FTSE All Share over 1yr
Source: FE Analytics
“First, Diageo is set to benefit from a number of long-term trends, including a growing preference for spirits over beer and faster growth in premium spirits where it is well positioned,” he noted.
“Spirits sales have also been more resilient than other alcoholic beverages in previous economic downturns and the company’s premium positioning means that it is targeting a more affluent consumer that may be less affected by rising rates and inflationary pressures.
“Finally, sales in its US spirits business have slowed in recent quarters following an exceptionally strong period over the Covid pandemic, but we expect that the worst of this has now passed, with the company reporting that inventory levels at distributors have returned to historic levels.”
RELX
Information analytics specialist RELX is another in the unique position to weather rising inflation and interest rates. The firm provides tools to analyse vast amounts of data and improve productivity.
“We like RELX’s strategy of systematically transforming its legacy information-based products into value-add decision tools, through the application of broader data sets and more powerful technology (including generative AI) and see this ongoing shift in business mix improving the trajectory of long-term revenue growth at RELX, as well as the quality of its earnings,” Nelson said.
Markets appear to also like the stock, which has made investors 17.3% over the past 12 months, more than three times the FTSE All Share index, as the rise of artificial intelligence has boosted the firm.
Total return of RELX vs FTSE All Share over 1yr
Source: FE Analytics
However, Nelson said its revenues are “relatively defensive and predictable” as demand is not correlated with economic growth.
“The business enjoys a high level of diversification by both sector and geography,” he noted. “There is also a high level of recurrence: more than half of revenues are subscription-based and the remaining transactional revenues are in large part contracted on a multi-year basis, providing further visibility”.
SSE
Renewables firm SSE is the final UK stock selection. The utilities company provides electricity networks and works on developing renewable energy – a theme that has been popular in recent years as the world tries to move away from traditional oil and gas.
Nelson said: “We see SSE shares as a play on the UK’s decarbonisation targets, with its core business activities forming two of the pillars on which the country’s net zero economy will be built.”
Shares have been under pressure in more recent times, however, as the price of oil and gas skyrocketed following Russia’s invasion of Ukraine and the general move away from environmental, social and governance (ESG) strategies that this has facilitated.
Total return of SSE vs FTSE All Share over 1yr
Source: FE Analytics
“While the renewables industry is facing short-term challenges from elevated costs relating to both higher interest rates and supply chain disruptions, we think that the networks business will prove extremely resilient in a challenging economic backdrop,” Nelson said.
“Energy networks are regulated monopolies and are a crucial piece of infrastructure, transporting energy around the country. Significant investment will be required in this infrastructure to connect renewable assets to the grid and to ensure that they are capable of providing consistent supply from more diverse and intermittent sources of generation.”