In July, the rate of inflation slowed to 2% from 2.5% in June. However, given the Bank of England forecast is for inflation to run higher into the end of the year, it’s not much help. It looks like we could be set for several years of high inflation (anything above 2%). So with that in mind, here are some of the best UK stocks I’d consider buying now to protect myself.
Why protection is needed
High inflation isn’t just an economic statistic that I can ignore. There are several implication of inflation. Firstly, it erodes the value of my cash. This is something often forgotten by people because it’s hard to tangibly see the value of the money eroding over the years.
Inflation usually leads to rising interest rates. This means that companies that have high levels of debt will find it more expensive to refinance or issue new debt.
For example, I might look at a firm and think it’s one of the best UK stocks. Yet what if the company is going to raise £500m via new bonds, and sees just a 0.5% increase in the yield demanded by investors? This small change would increase the interest repayments by £2.5m!
For some sectors, inflation is more or less of a problem. For those selling goods, increasing the price can offset the rising inflation. However, this can see lower revenue if customers choose to go elsewhere. If inventory turnover is high, then inflation is less of a problem. Yet if items (like high-end cars) are held for a year or more before selling, it’s more of a problem.
The best UK stocks I’m looking towards
I’d start by thinking about areas that should cope with higher inflation. For example, I’d consider buying shares in Diageo. The global drinks manufacturer is able to move inventory quickly. This is due to it having mass market brands such as Guinness, Baileys and Captain Morgan. These sit in affordable price points for consumers.
Further, alcohol tends to have low elasticity of demand. This means that even if the price of a bottle of beer rises by 10%, demand might only fall by 3%. So even if Diageo needs to raise prices in the UK to counter inflation, revenue shouldn’t be hit substantially.
Another of the best UK stocks I’d consider is IG Group. The FTSE 250 stockbroker and spread betting company has low levels of debt and financing costs. In the latest annual report it only had financing costs of £5.9m. When I compare this to profit before tax of £450.9m, it’s very much under control.
Even if rates do rise, IG Group shouldn’t be negatively impacted in a large way. Given that higher inflation and rates should see more volatility in equity markets, the rise in revenues from retail investors should also offset any hit on debt costs.
I’m considering buying both companies above the best stocks to buy now to offset inflation going forward.
