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Highlights
Rising prices tend to have an impact on stocks.
While growth stocks fall, value stocks gain as prices of commodities and services rise.
A smart investor evaluates investing techniques in a detailed way before investing in the stock market.
Inflation tends to have both direct and an indirect impact on stocks. Value stocks (stocks which trade at a lower value than their fundamentals) and growth stocks (stocks which are expected to grow at a rate above average market growth) perform differently as consumer prices rise. While growth stocks fall, value stocks gain as prices of commodities and services rise.
Value stocks tend to do better in times of higher inflation. In short, value stocks generally get positively impacted amid rising prices in the short term compared to growth stocks.
Value stocks during price rise
Value stocks carry higher intrinsic value compared to their existing trading price and hence are preferred by investors. These have higher current cashflows and hence their value increases amid inflationary times compared to the shares promising returns in the long term.
Growth stocks remain under pressure during inflationary times, thereby, sharing a negative correlation with price rise.
Which sectors tend to do well during inflation
Growth and tech stocks are the most impacted due to inflation as higher prices ultimately lead to a hike in interest rates. The future value of a company’s profit gets discounted due to rising prices and rates.
On the other hand, sectors such as healthcare, banks, consumer staples, wealth platforms, toll roads, utilities, banks and mining tend to do well in such a setting.
Real estate stocks have traditionally done well amid higher inflation due to the pricing power of the segment. Similarly, banking stocks are considered good investments too due to the traditional rule of thumb that banks’ net interest margin (NIM) benefits from increasing rates. Mining stocks have also done well in inflationary times since the price of commodities generally rise when prices are increasing.
Bottom Line
While inflation may have a different impact on different sectors of the economy, wise investors ensure to always employ the right investment approach in such times. Investors are always advised to make use of an investing style mix to cut down on the risk due to rising inflation to a large extent.
Both growth and value investing techniques help diversify the investment portfolio when used in combination. But investors should know the right way to use them to reap maximum gains while prices are increasing.
A smart investor evaluates investing techniques in a detailed way before investing in the stock market.
