ECONOMISTS often see inflation as a demand problem that can be solved with higher interest rates and tighter fiscal policy.
But there’s another side to solving higher prices — lifting supply.
And as the world rebuilds supply capacity, investors have an opportunity to find companies that will benefit, says Pendal portfolio manager Paul Wimborne.
“If you can build up more supply in the long term that can also help to suppress inflation,” says Wimborne, co-manager of the Pendal Global Emerging Market Opportunities Fund.
“Whether that’s funded by governments or private companies, we’re finding opportunities at the moment in some portfolio holdings that are exposed to this trend and are experiencing very strong business conditions as a result of new investment in capacity.”
Wimborne says the opportunity is emerging because of a mismatch between investment over the past decade and the goods and services that the planet requires.
“There’s been lot of investment into technology, the internet and building out the digital infrastructure. But not a lot has gone into what we would call the old economy — energy and industry.
“We think that might be more of a focus over the next decade.”
Wimborne offers three examples of companies positioned to win from the reset.
China Oilfield Services is a leading oilfield services supplier in the Chinese offshore oil industry and a major supplier to oil and gas major CNOOC.
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“The Chinese government seems to be maximising domestic energy production, including offshore oil and gas,” says Wimborne.
“Energy is a domestic security issue for many countries now. China has realised that if they want more energy security in the short term, focusing on oil and gas production is probably the easiest way to do that.”
Wimborne says as a result, CNOOC’s plans to lift its capital spending by 15 per cent this year.
“China Oilfield Services will be a major beneficiary of that.”
Cemex is a Mexican cement producer with production assets across many countries.
“The cement industry is seeing a lot of significant cost pressure through rising energy prices — it takes a lot of energy to make cement — but the demand environment remains very strong, so the company has had no trouble passing through these costs in price increases,” says Wimborne.
Cemex has seen volumes lift 16 per cent year on year, driven by strong demand in Europe and the Middle East.
“And Mexico, its biggest market, is seeing activity accelerating in the industrial sector and housing markets have picked up.”
“Money earned by Mexican’s working in the US has boosted demand for bags of cement, which are largely sold to individuals,” says Wimborne.
“In Mexico, when consumers have a lot of money, a popular activity is buying bags of cement and building extensions to their houses.
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“And finally, the US itself is also a strong market for them at the moment with cement volumes up 9 per cent year on year.”
Larsen & Toubro is an Indian construction and engineering conglomerate with exposure in India but also across neighbouring regions, in particularly the Middle East.
”We’ve seen in their latest results a strong increase in the order book. About 74 per cent of their order book is domestic and the Indian government has a big focus on capex projects at the moment.
“India is benefiting from higher tax revenues and are using that to increase building out things like roads and railways.
“It’s quite skewed at the moment to government work, but we expect over the next few years as a result of inflationary pressures coming through that the private sector to start building that capex as well.”
Paul Wimborne is a senior portfolio managers and co-manager of Pendal’s Global Emerging Markets Opportunities Fund with James Syme.
The fund aims to add value through a combination of country allocation and individual stock selection.
The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.
The stock selection process focuses on buying quality growth stocks at attractive valuations.
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