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1 big macro risk to stock market investing and how I’d beat it

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The economy may be due for a rebound, but risks are showing up too. Like inflation. The good news is that this macro risk to stock market investing can be countered by making strategic buys, in my view. 

Here’s how.

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Inflation fears makes a comeback

I think this one was visible from a mile away. The run-up in stock markets, commodity prices, and even real estate since last year were already signs of asset price inflation. ‘Assets’ here refers to various investing classes. 

And where there is sustained inflation in assets like industrial commodities, it gets built into expectations for inflation, since these are inputs for finished products. This is especially so if the economy itself is due for a growth bounceback. This can create demand pressure too. 

Investing during high inflation

Traditionally, gold is a good hedge against inflation as rising prices erode the real value of paper money. The nature of inflation this time, however, makes miners and oil companies a good investment.

The reason is that these industries are on the right side of inflation.

FTSE 100 industrial metals’ miners like Anglo American, BHP, Glencore, and Rio Tinto have benefited from the rise in prices as China’s government opened up the fiscal taps as it came out of the covid crisis. With the Biden government in the US set to do the same now, commodities could continue to rally.

In fact, some even believe that we are at the start of a commodity supercycle. That may not be the best news for inflation, but it is for miners. 

The oil play

Oil prices are an important component of inflation because they have a second round impact. A rise in the price of fuel affects my travel costs. But it also affects the costs of goods I buy from the supermarket, because they too are being transported to the point of sale at a higher cost now.

The gainers from rising oil prices, of course, are FTSE 100 oil giants like BP and Royal Dutch Shell. Their share prices have languished for some time now, but I think this could be the year when the trend changes. 

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Moreover, they also pay dividends. And going by the expected improvement in their performance, the dividends could also rise. This too, helps me as inflation rises. 

If instead I had invested in a stock whose margins were squeezed because rising inflation was increasing costs, it would be more likely to cut dividends than increase them. This would mean that the value of my dividend would fall not just because of inflation but also in nominal terms. 

If oil companies increase dividends, however, this makes up for some loss in the real value of money because of inflation. 

A note of caution

That said, each of these companies has individual issues to contend with. For Glencore, it is corruption charges, for Rio Tinto, it is the threat of strikes, and for oil companies, it is the struggle to go green, as examples.

So I would choose from among these with care. 

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Manika Premsingh owns shares of BP, Glencore, and Royal Dutch Shell B. The Motley Fool UK has no position in any of the shares mentioned. 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.