Which Equity Sectors Can Combat Higher Inflation? (2024)

FAQs

Which Equity Sectors Can Combat Higher Inflation? ›

Energy, equity REITs,¹ and financials are some of the equity sectors that could stand to benefit in an inflationary environment.

Defensive sectors.

Candidates come from utility stocks, consumer staples and healthcare, defensive sectors that tend to fare well in inflationary or recessionary environments. This is because there is a steady demand for their products regardless of economic conditions.

That means that typically, their stock prices move higher when inflation moves higher. – Conversely, companies in sectors such as consumer staples and utilities have negative correlations with inflation. That's in large part because these companies consume commodities, which increases their input prices.

Bonds or debt funds that invest in bonds are linked closely to interest rates in the economy, which works closely with the inflation rates. If inflation rises, interest rates rise. Interest rates and bond prices move in opposite directions. Hence bond prices will fall in this case.

Inflation allows borrowers to pay lenders back with money worth less than when it was originally borrowed, which benefits borrowers. When inflation causes higher prices, the demand for credit increases, raising interest rates, which benefits lenders.

Gold, Precious Metals, and Commodities

All that glitters is gold, especially during times of inflation. Precious metals such as gold have been historical favorites for hedging against inflation due to their scarcity, tangibility, and historically negative correlation to paper money.

What Are the Worst Things to Invest in During Inflation? Some of the worst investments during high inflation are retail, technology, and durable goods because spending in these areas tends to drop.

Gold may be the best hedge against inflation and geopolitical risks. Gold emerged as the best commodity to serve as a potential hedge against inflation and geo-political risks.

What sector is hit hardest by inflation? ›

Medical care, used cars and trucks, education costs, and food away from home also edged up. Economists say shelter and fuel costs are the two biggest anchors weighing inflation from reaching levels the Fed wants to see.

Financials First

The financial sector has historically been among the most sensitive to changes in interest rates. With profit margins that actually expand as rates climb, entities like banks, insurance companies, brokerage firms, and money managers generally benefit from higher interest rates.

Physical assets and equity are less sensitive to inflationary risk and may even benefit from unanticipated inflation.

During inflationary periods, commodities (and the stocks of companies that deal with them) tend to outperform the overall stock market. This can include energy companies, precious metal miners, steelmakers, and other industries. You can also buy exchange-traded funds (ETFs) that track baskets of commodity stocks.

The figure shows that when inflation is driven by the Fed unexpectedly cutting interest rates, young and middle-aged college-educated households lose the most, while older and less-educated households are largely unaffected or even benefit.

Companies in certain sectors (such as energy and materials) tend to own or control physical assets; they may also sell commodity-based products. Since the value of their assets and the prices of their products increase with inflation, their stock prices are positively correlated with inflation.