With inflation currently more persistent than initially thought, it is likely that rising costs will linger in the months ahead, making it one of the biggest risks investors face in 2022.
That's why our investment professionals are increasingly focused on uncovering pricing power. This allows companies to protect their profit margins by passing those cost increases to their customers or simply raising prices.
High and stable margins can be an indication of pricing power, as illustrated by the following examples:
- Businesses that provide essential services, like health care giants Pfizer, UnitedHealth Group and Abbott Laboratories. The average gross margin in the pharma/biotech sector tends to be around 70%1 and is very stable with little fluctuation.
- Consumer businesses with strong brand recognition, like beverage makers Coca-Cola and Pepsi, or food and drink processing conglomerates Nestlé and Unilever. Many household and personal products companies have the ability to pass on higher costs to consumers due to their strong brands, robust pricing power and growing market share.
- Companies in industries with favourable supply and demand dynamics. Semiconductor and chip makers like TSMC and ASML are experiencing huge demand with limited supply. TSMC's pricing power was evident in August 2021 after it announced it would raise chip prices by as much as 20%.2
- Businesses serving customers who are relatively insensitive to changes in price, like luxury goods companies LVMH and Kering.
For more on the implications of the current inflationary environment, take a look at Inflation: Navigating a Resurgent Challenge, a content hub brought to you by Investment Week, Professional Adviser and Capital Group
1 Average and standard deviation of gross margins calculated for the five-year period ended 30 September 2021. Reflects industries within MSCI World Index. Sources: Capital Group, FactSet, MSCI
2 As at 23 October 2021. Source: Reuters
Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. The information provided is not intended to be comprehensive or to provide advice. This information has been provided solely for informational purposes and is not an offer, or solicitation of an offer, or a recommendation to buy or sell any security or instrument listed herein.
