Higher commodity prices have recently sparked fears of a rapid rise in inflation. This could present a significant challenge for investors. Historically, stocks and shares have performed relatively badly in periods of high inflation. However, that’s not always the case. Some companies, such as the FTSE 100 businesses outlined below, can be better positioned to weather an inflationary environment.
That said, past performance should never be used as a guide to future potential. So, while businesses such as those outlined below have performed well in periods of high inflation before, that does not necessarily mean they will this time around. That’s something investors need to keep in mind when selecting FTSE 100 stocks.
Stocks to beat inflation
Rising commodity prices are behind inflation fears. Therefore, I think it could make sense for me to buy mining companies such as BHP, Rio Tinto and Anglo-American.
These are some of the world’s largest mining companies producing everything from iron ore to copper and diamonds.
The prices of these critical commodities have been increasing rapidly over the past few months. That has led to bumper profits at these businesses. They have passed the majority of this additional income onto investors with huge dividends.
Of course, this may not continue. Commodity prices are highly volatile. In the past, these companies have suffered significant declines in profitability due to sudden falls in commodity prices. That’s something investors need to be aware of before buying these corporations.
In an inflationary environment, mining costs would also increase. That could lead to a decrease in profitability.
Still, as a way to invest in rising commodity prices and try to beat inflation, I would buy these firms, despite the risks they face.
FTSE 100 growth and income
It’s not just commodity companies that can be good ways to hedge a portfolio against inflation. Businesses with pricing power or the ability to set their products’ prices without seeing consumers go elsewhere can be suitable investments as well.
Diageo is a great example. I like this group for its portfolio of high-quality drinks brands. Many of the company’s products, such as its premium whisky and Guinness, are aimed at consumers who are not necessarily worried about the cost. They like the products and are willing to pay for them. As such, the corporation should be able to increase its prices to consumers if inflation drives up the cost of raw materials.
That being said, one of the most significant risks the FTSE 100 company faces is competition. In recent years, it has lost market share in some areas to smaller upstarts. There have also been alcohol bans in one of its largest markets, India. These challenges imply it’s not always going to be plain sailing for the group. They may also impact its ability to grow.
But even though Diageo does face some significant risks, I would still buy the stock for my portfolio today, considering its competitive advantages.
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Rupert Hargreaves owns shares in Diageo. The Motley Fool UK has recommended Diageo. 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.