“A major theme in equity markets at the moment is about managing rising inflation,” Mr Carlyle said. “There are companies out there that can, through their pricing power, pass higher costs on to consumers without this substantially negatively affecting demand for their products,” he explained.
He noted that the spike in fuel prices is causing a particularly acute rise in inflation, but over the longer term we could see prices continue to rise at a faster rate than we have become used to in recent decades. Mr Carlyle noted that history suggests that moderate levels of inflation can be advantageous for equity investors; it’s just that when price rises get out of hand that this becomes more challenging.
Pricing power is often the key to navigating these difficulties. He gave his insight into which types of businesses can usually dictate terms to the market, saying this needs to be assessed case-by-case. “You really need to understand both the companies you're thinking of investing in and also, in particular, the industry in which they operate,” he said.
From technology companies to food retailers, through to luxury goods manufacturers; whether they will be able to thrive under these conditions will depend on the particularities of each firm and the circumstances in each market. “It's not the sort of thing that you can run a quantitative screening on to know if a company clearly has pricing power,” Mr Carlyle said.
More broadly, coping with inflationary times is a challenge when managing stock, supply chains, pricing, wage bills, etc. Mr Carlyle pointed out that global companies that have been operating in emerging economies with a recent history of inflation will have experience that can be used in developed world markets. Smaller companies may struggle, as it has been decades since companies based in the West have had to manage their businesses during a period of price rises.
“A long perspective is additive,” he noted. “Our most experienced investors can talk about their experiences of investing through inflationary environments. So, we're able to learn from history,” he added.
This episode is the third of the second season of the “Investing for the long term” podcasts series featuring Capital Group. These monthly podcasts, produced and hosted by Delano and Paperjam, explain some of the key challenges investors are facing and the investment opportunities related to those challenges. The first series can be accessed here.
To listen to Capital Group’s podcasts, click here.