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Inflation trend stock pick

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Interest rate, bond yield and tapering are just some of the buzzwords on the stock market feeds as central banks introduce policies to ease inflation.

But how does this relate to the stock market?

Bonds are a form of credit agreement between governments and investors, whereby investors lend money to the government. Interest rates are used to control the borrowing of money – when interest rates rise, the cost of borrowing increases. This is used as a mechanism to reduce inflation.

Read more on government bonds and interest rates here or click below

Bonds and Interest rates

 

And as inflation continues to make headlines, we look into companies that may offer investors protection.

Harmony Gold Limited (JSE:HAR)

As market inflation expectations rise, gold stocks continue to be in the spotlight, especially because of the appeal to hedge against inflation.

Trading at R57.90 as of writing, Harmony is among the largest gold mining companies in the world. In a deal concluded in late 2020, the mining giant acquired all Anglo Gold Ashanti assets in South Africa. According to Harmony CEO, Peter Steenkamp, the acquisition demonstrated "the commitment to the sustainability of gold” and spoke of, "our confidence in South Africa and our determination to grow value for all of our stakeholders."

As a gold mining company, the group stands to benefit from rising prices of gold as inflation fears weigh in.

By the end of the 2021 fiscal year, Harmony reported an increase in gold production of 26%. Profits from production increased by 66% to R12 billion, with net profits increasing by 758% to R5.6 billion. Earnings per share more than doubled to 919 cents, compared to a loss of 164 cents per share in the previous comparative period. Following the increase in production, mineral resources and reserves increased by 19% and 16% respectively.

Commenting on the financials, Steenkamp said: "We delivered a stellar set of full-year results as the resilience and determination shown throughout the company ensured we achieved our strategic objectives. We adapted to a changed environment in the face of the ongoing Covid-19 pandemic with the successful acquisition.

"This demonstrates how we have further transformed our earnings profile through the acquisition of high grade assets, while delivering on our strategy of safe, profitable ounces and increasing margins."

Given the trading price as of writing, and an earnings per share (EPS) of 912 cents, the group's price to earnings (P/E) ratio is 6.3x.

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Harmony Gold Mining Company Limited

Barclays plc (US:BCS)

While many stocks reacted negatively to interest rate hikes in the US market, banks continue to rally behind the hikes, and the 10-year bond yield reached its January 2020 high. According to the data from Louis Fed, the rise in yields comes after investors expected the annual inflation rate to rise by more than 2%.

Given the resistance to inflation fears, Barclays is among the listed banks in the US market that have shown strong growth during a period of uncertainty. The group started the 2022 calendar year on a positive. Despite the sell-off since the beginning of the year, Barclays’ share price surged to its highest level since 2 September 2020 at $11.60, representing a 110% appreciation in price, as of writing.

During the group's third quarter in October 2021 (Q3 2021), Barclays managed to keep its income at the same level as the prior year at £16.8 billion. This was achieved despite the depreciation of the USD/GBP pair. Costs also increased during the period. Profit before taxes increased to £2 billion from £1.1 billion the prior year, while earnings increased by more than 100% to 30.8p (7.6p Q3 2020).

Given the strong mortgage balance of £157 billion (£148.3 billion Q3 2020), the group’s financial director Tushar Morzaria said: " While unsecured lending remains subdued, mortgage balance growth continues and the Group is well positioned for rising rates.” This is supported by "… strong UK mortgage and deposit volumes, [and] positive trends in UK and US spending."

Using the current trading price of 200p on the group's main listing in London and the EPS of 30.8p, Barclays has a P/E ratio of 6.4x.

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Roundup

As uncertainties continue to take a toll on the global economy, investors may continue to experience volatility, especially as interest rates are expected to rise.

While the above may be the case, hedging against inflation may assist investors in offsetting losses that a market sell-off may cause during the period.

 

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Sources – EasyResearch, Barclays plc, Harmony Gold Limited, Barron's.

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