• Inflation still high
• Kevin O’Leary advises on companies that have pricing power
• Energy sector, healthcare, consumer discretionary and ETFs recommended
The dizzyingly high inflation is one of the dominant issues on the stock exchanges. In the euro zone it climbed to a new record high of 9.1 percent in August. In the US, inflation appears to have peaked at 9.1 percent in June, as the annual inflation rate fell to 8.7 percent in July, which is still well above the US’s declared 2 percent target -Central Bank Fed lies. If economist Steve Hanke has his way, inflation in the USA should remain high and even be accompanied by a severe recession in 2023.
Kevin O’Leary still advises stocks
Against this background, it is not easy for investors to position themselves. However, shark tank star and entrepreneur Kevin O’Leary has a few tips for investors on how to find suitable investments despite high inflation. First, in a CNBC interview quoted by MoneyWise, the star investor reiterated that he believes stocks are the way to go even in this difficult environment: “Even when interest rates are going up, stocks are where you want to be, since a fixed income is being crushed even more”. The US Federal Reserve has now reacted to the sharp increase in inflation and has already raised the key interest rate several times this year. Further increases are also quite foreseeable.
Companies with pricing power preferred
O’Leary advised investors to look to industries that can easily pass price increases on to their customers. As the stock market professional explained: “What you should invest in now in terms of stocks, especially against the backdrop of rising interest rates, are companies that have pricing power. In other words, whose goods and services are necessities for people, so they are willing to see a small price increase , sometimes a bigger one, when rates go up.”
Energy sector as a crisis beneficiary
Specifically, the star investor named the energy sector as a good place where investors could sit out inflation. Even in times of crisis, the heating must continue, food must be prepared or the car must be used. Soaring oil prices have already resulted in record profits for energy companies this year. Take the oil giant ExxonMobil, for example: In the second quarter of 2022, Exxon earned $17.9 billion, which is $13.2 billion more than in the previous year. Sales shot up 70 percent to $115.7 billion. The situation is similar at Shell. Here, too, a record profit of 11.5 billion US dollars was on the books in the second quarter, more than twice as much as a year earlier. The share development of the two oil giants is also impressive this year. While the market-wide S&P 500 has lost around 18 percent since the beginning of the year, the Exxon paper on the NYSE has risen around 55 percent. Shell shares have already gained around 43 percent in London this year.
Consumer goods and healthcare also in demand
In addition to energy, O’Leary identified two other areas that would make sense during high inflation: “Right now healthcare is looking very good, just like consumer discretionary is looking very good.” People are also dependent on medicines and supplies such as food and hygiene products during times of crisis, which is why price increases are more likely to be accepted here too.
Stay away from tech stocks
What investors should leave the finders alone, however, are technology stocks. These are suffering particularly from the central banks’ departure from the ultra-loose one monetary policy, which was driven during the corona pandemic, and have already been badly damaged this year. The star investor said: “When interest rates rise, P/E ratios fall and share prices correct.” The NASDAQ Internet sub-index, which focuses on tech stocks, has even lost more than 40 percent of its value since the beginning of the year.
ETFs as a hedge
As a further tip, the Shark Tank judge advised investors to invest in Exchange Traded Funds (ETFs). However, he opposed a broad ETF tracking the S&P 500 as too risky during inflation: “Just owning the index could be very risky as lower quality balance sheets like airlines’ may not be as good at the moment do well when rates go up because that means their debt service goes up,” O’Leary said. Instead, the investor here advised ETFs that focus on companies that pay strong dividends and value balance sheets of the highest quality, as well as companies that generate cash and offer a high yield. Specifically, the stock market star recommended the ALPS O’Shares US Quality Dividend ETF, whose top five positions include Johnson & Johnson, Procter & Gamble, Microsoft, Home Depot and Apple – all companies that have a history of surviving during periods of high inflation and would have flourished. However, it remains to be seen whether this will also be the case in the future.
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