Stock picking in times of high inflation

Inflation concerns persist but stock market investors are advised not to be disheartened by this scenario.

Inflation slowed to 6.3% in August (from 6.4% in July) due to easing oil prices and slower increases in food prices. Inflation now averaged 4.9% year-to-date and BDO Securities expects it to settle at 5.3% for this fiscal year assuming inflation will peak this quarter.

However, the Philippines remains vulnerable to inflation risks given its status as a food and energy importer.

“Philippine inflation basket is more sensitive to food and energy commodities (oil, coal, rice). While commodity price trends have softened as of late (due to slowing global growth concerns), we think domestic factors (i.e. tight food supply) are set to become the primary drivers of inflation going forward,” said Abigail Chiw, BDO Securities Head of Research.

BDO Securities said that while elevated inflation remains the key risk for equities and earnings growth — as it erodes consumers’ disposable incomes, investor risk appetite, and overall business sentiment – investors can look at stocks with strong balance sheets and resilient business models.

“Investors can explore stocks that offer products and services with enduring demand and cost pass-through structure as these are better positioned to manage inflation headwinds,” added Chiw.

Cost pass-through describes what happens when a business changes the price of the products or services it sells as a result of change in the cost of producing them.

“Given the uncertain macroeconomic backdrop, we suggest investors to consider quality names in consumer, banks, property, and conglomerates, or sectors which we expect to still benefit from positive reopening dynamics and offer healthy earnings growth at reasonable valuations. Several of these names are also trading at deep discounts (i.e. below book value) and are good value recovery plays, in our view,” she explained.

For the consumer sector, Chiw said investors can look at Puregold, Robinsons Retail and D&L Industries; while BPI, Metrobank and Security Bank are decent picks for the financial sector.

Ayala Land, Megaworld and Robinsons Land are the stock picks for the property sector, while Alliance Global, SM Investments and GT Capital are strong bets among the conglomerates.

BDO Securities is a full-service, multi-product securities distribution house, and a wholly-owned subsidiary of BDO Unibank’s investment banking arm BDO Capital & Investment Corporation. It covers a number of domestic equity funds that actively trade the stock market and has a solid equity research offering, with its analysts regularly making insightful “buy” and “sell” calls.

The company was declared the Best Retail Broker in the Philippines at the recently held 15^th Annual Alpha Southeast Asia Best Financial Institution Awards 2021.