Having a half-Spanish wife means I have spent a fair amount of time over the years in Spain. Wander down the bread aisle of any supermarket there and you will be assailed by a range of products from Grupo Bimbo.
Grupo Bimbo is Mexican. It operates in 34 countries and boasts that it “creates experiences all over the world”. How tasty those experiences are is a matter of opinion, but its products are clearly popular — and especially in the Americas.
Grupo Bimbo’s share price has more than doubled over the past three years. Crucially, the company has managed to raise its prices and protect its profit margins.
I am sure there is a gag in there somewhere about a business that makes dough from dough being able to cope with things rising, but there is a serious point to make here.
Grupo Bimbo and other multinational companies that trade in emerging markets countries are pretty good at coping with inflation. They have to be. Mexico’s inflation rate may be less than the UK’s at the moment — 4.7 per cent — but it has gone through many rough patches since 1945, when Grupo Bimbo was founded. Inflation has averaged 19 per cent a year over the past 60 years.
Looking at the countries the food manufacturer operates in today, inflation is around 115 per cent a year in Argentina. In Venezuela it is 400 per cent a month.
The ability of some companies still to operate in economies like this demonstrates why international equities make a natural home for investors when inflation is everywhere. Readers may point out that, as a global equity investor, I would say that. Perhaps, but someone needs to.
With interest rates rising and cash making 6 per cent in money market funds — or UK 10-year gilts yielding 4.3 per cent — there is an obvious temptation to buy bonds and add to savings in high-yield accounts. But these high yields are often not higher real yields. Yes, you are getting a higher interest payment (which may be taxed), but the price of what you buy is likely to have risen further.
Equities are less predictable, and that makes investors uncomfortable with them. But the evidence suggests that over the long term they are better at delivering real returns — above inflation.
There are caveats to this statement. The transition phase to higher inflation is generally painful. Equity markets often fall from high valuations that built up during a low-inflation era. Equities fell following the invasion of Ukraine and the oil price rise that followed.
Big spikes in commodities and wages take some adjusting to, but good companies do eventually adjust and catch up. Inflation can even be beneficial, giving companies an excuse to lift prices — and for some to do so above inflation, permanently enhancing profit margins.
Over the past three years the total return on UK equities (including dividends) has been 36 per cent, while the cost of living has risen by 21 per cent. Global equities over the same period have returned 31 per cent in sterling — the UK numbers have been helped by higher dividends being paid.
Last year was not an outlier. Look at what happened during the aggressive inflation of the 1970s. The FTSE All Share collapsed in 1973 — down nearly 70 per cent by the end of 1974 after the price of oil tripled.
But it more than doubled in 1975, and equities preserved real wealth through the persistent inflation later in the decade. Overall, the UK equity market roughly doubled in the five years after Margaret Thatcher’s election in 1979, while the cost of living rose by around 70 per cent.
Of course, some companies cope with inflation better than others, and some fundamental features gain importance when it comes to selecting stocks for an inflation-resistant portfolio. The companies that cope best generally make stuff or offer services that people will struggle to do without. They have few competitors and carry little debt (avoiding higher interest payments).
When we discuss inflation with company managers they point out their years of experience in managing it. Unilever, which I hold, has only performed in line with what the market expects over the last couple of years and arguably needs a shake-up of its product line-up, but its bosses have a pretty good idea of which brands cope best with price rises.
Marmite eaters will not switch to Vegemite (nor vice versa), which is why Unilever has managed to push through a 23 per cent price rise during the past year. On the other hand, Dove soap users do not just have sensitive skin — they are also price sensitive and happy to switch brands. Unilever’s response here has been more subtle — “shrinkflation”. Dove soap bars were made 10 per cent smaller last year, according to The Grocer magazine.
Unilever is one of those companies that operates in emerging markets, where it has had to learn these important nuances. Many companies that operate in persistently high inflation conditions have shown they can boost shareholder value despite the pressures.
Argentine conglomerate Sociedad Comercial del Plata, which has energy, rail transport and real estate interests, has seen its shares rise by 1,500 per cent over the past three years, according to Bloomberg. In pesos, its price has risen from 3 to near 50. So it has easily outperformed global equities, despite the loss on translation from the falling Argentine peso. It trades on only five times earnings.
Argentines tend to save in US dollars if they can, to avoid holding pesos (a dollar cost 4 pesos in 2010; now it costs 350 pesos) but it is notable that many local equities priced in pesos have also protected local savings from inflation in recent years.
For those, like me, who prefer to avoid such frontier markets, Mexico has not just Grupo Bimbo but also Femsa (on only 12 times earnings, according to Bloomberg). It has grown out of distributing Coca-Cola across Mexico and has used this distribution network to develop convenience stores. It used to distribute Heineken but recently sold its 5 per cent Heineken stake, leaving Femsa with an extremely strong balance sheet.
Mexico is benefiting from the US recovery, boosted by many companies north of the border preferring to have parts of their supply chains nearer home, rather than relying too much on Asian outsourcing. Its inflation rate is lower than the UK’s.
Use your loaf!
Rising returns from cash and fixed income look attractive — and they have a place in a portfolio. But equities are the place to look if you want to beat inflation. If you think inflation is here to stay — and I think it will take central bankers’ effort and time to tame — holding some Bimbo-like companies in the mix has appeal.
Simon Edelsten is co-manager of the Artemis Global Select Fund and Mid Wynd International Investment Trust