3 ways to beat inflation with stocks

Investors are fretting over rising prices. Paul Summers looks at three ways to beat inflation via the stock market.

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Despite the Bank of England thinking it won’t last, investors have become increasingly jittery about inflation. This isn’t all that surprising when you consider how damaging rising prices can be.

As my Foolish colleague Malcolm Wheatley commented in his recent piece:Inflation is a devastating destroyer of wealth and standards of living.” Strong words but he’s absolutely on the money.

Like Malcolm, I believe the best way to beat inflation is via the stock market. However, there are certain parts that could prove particularly good destinations for my cash.

Buy quality to beat inflation

I’m a big fan of quality stocks. These are companies that have strong brands, sound finances, consistent earnings, and big profit margins. On a geekier note, they also tend to be capital-light and able to generate great returns on the money they invest, otherwise known as Return on Capital Employed (ROCE). Let me explain.

Naturally, I want a business that produces a higher return than inflation. If prices jump by 10%, any stock generating the same ROCE (or worse) isn’t really doing anything. However, one generating a ROCE of 20% is still doing well for investors, under the circumstances.

I’m not the only one who thinks this is a good way to beat inflation. Biased he may, be but top UK money manager Terry Smith thinks stocks in the Fundsmith Equity fund have that quality tilt which should preserve (and eventually enhance) investors’ wealth. That said, there’s nothing to stop the actual value of these holdings from falling if investors head for the exits.

Grab some shiny stuff

Another way to beat inflation would be to have some exposure to precious metals. One obvious candidate here is gold. Historically, anything connected to the shiny stuff tends to do well in inflationary times because of its trusted ability to hold its value.

If stuffing a load of gold bars under the bed doesn’t appeal, UK investors have a number of options. In the FTSE 100, there’s producer Polymetal International. In the FTSE 250, there’s Centamin. If diversification was important, I could buy an exchange-traded fund (ETF) that holds the biggest miners around the world.

Another option would be to buy a passive fund that tracks the gold price. This might be the least risky option since it avoids any company-specific risks. That’s not to say it’ll always be a comfortable ride, of course, especially if interest rates rise. After all, gold doesn’t generate income on its own! 

Don’t forget real estate

Thanks to the growing desire to work from home, post-coronavirus, the UK property market has been in fine form in 2021. However, owning stocks that have links to real estate can also help investors beat inflation. 

Step forward REITs (Real Estate Investment Trusts). These are listed companies that generate income for holders from property. Although nothing can be guaranteed, this asset tends to increase in value when inflation rises because price increases are passed through in rental leases (assuming demand for property is there). 

As you might expect, there’s no shortage of options out there for UK investors. These can be invested in office space, healthcare buildings and retail units. Thanks to the huge and growing popularity of online shopping however, my favourite pick in this space is warehouse owner Tritax Big Box.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers owns shares in Fundsmith Equity. The Motley Fool UK has recommended Tritax Big Box REIT. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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