A few months ago, Warren Buffett said something characteristically astute. He was quizzed on inflation. To this, and I paraphrase, he said that prices are clearly rising. But also that these increases are being accepted. I think the fact that they are being accepted is really the operative part here.
FTSE 100 companies and inflation
The fact is, a number of FTSE 100 companies have echoed what Warren Buffett said. Inflation, particularly commodity price inflation, was beginning to make them uncomfortable. It added to cost pressures a few months ago, which could have been challenging for the ongoing economic recovery. But, cut to now and, strangely enough, I find some reduction in the concern around inflation despite rising prices in the interim. At least this is the case in the results that I have seen.
The reason for this might just be what Buffett said. Some companies are being able to pass on costs. As long as companies are able to raise their prices in response to increasing costs, inflation need not be that big a problem. It becomes a problem only when costs need to be absorbed by companies or they face a demand slowdown if they do. And that does not bode well for the economy.
Passing on the costs
Clearly, though, we are not at that place yet. FTSE 100 companies like paper and packaging providers have so far successfully passed on costs. These include the likes of Mondi, Smurfit Kappa, and DS Smith, which could then come out relatively unscathed from inflationary pressures.
So, for someone like me who takes macro developments into serious consideration when investing, this segment looks quite attractive. These would not be the first stocks I would have thought of to buy when inflation first started rising. My tendency was more towards oil and industrial metals, because these companies actually gained from rising prices. And it is the rising prices of these commodities that fed into cost pressures for all others. However, over the last few months, this is another set of attractive companies to emerge as well. And these ones are clearly well placed to handle inflation.
That said, I think the full effects of rising costs are yet to come through. As was revealed during the UK’s recent autumn budget, the Office of Budget Responsibility expects headline inflation to average 4% in 2022. So, realistically speaking, I reckon that the challenge can drag on longer.
My takeaway
I will continue to monitor how things evolve for the packagers over the next few months. They are on my investing wish list for 2022 in any case. This is because one of the big themes I like right now is the e-commerce ecosystem. This includes companies from online sellers to warehouses and, of course, packaging providers, whose growth has been accelerated by the pandemic.
I reckon that over the next 10 years these companies could become far bigger than we can anticipate today. And if they are great at fending-off medium-term challenges like inflation, that is even better for me as an investor in their stocks.
