Inflation is coming and here are the stocks that will benefit, strategist says

Published Tue, Feb 9 20212:32 AM ESTUpdated Tue, Feb 9 20219:10 AM EST

With economists widely expecting inflation to continue to rise in the coming months as we exit the global pandemic, one investment bank is advising its clients to invest in two sectors that it believes will benefit from the reflationary environment. Peter Garnry, head of equity strategy at Saxo Bank, said in a recent note that while the "classic hedges against higher inflation are gold, inflation-protected government bonds and energy … the equity market also offers interesting alternatives." "There's so much stimulus coming and the tight coordination between fiscal and monetary authorities is definitely playing into the hands of equities at this point in time, until we get to a certain interest rate level when things will begin to change," he told CNBC's "Street Signs Europe" on Monday. Garnry named a number of stocks that the bank thinks will benefit from reflation — a move higher in growth and prices — which he described as "the most important" market theme of the next 12 to 18 months. There are two sectors in particular that Garnry's keen on, as both have performed well in the past during periods of reflation: financials and commodities. "We're advising our clients to get exposure to the commodities sector, you can do that in the equity sector, you can also do it obviously in commodity futures which is a little bit more difficult, and then the financials (where) we think the yield curve will continue to steepen, and even in Europe as well. So banks and insurance companies should also perform quite well," he added. Earlier this year Saxo Bank launched its Saxo Commodity Sector basket, a list of 40 stocks with exposure to the commodity sector across the agriculture, chemicals, energy, and metals and mining industries. Names on the list include Deere & Co , Corteva and Nutrien within the agriculture sector. In energy it includes Shell , Total , Chevron and Exxon Mobil . Names from the metal and mining sector include Rio Tinto , BHP Group and Vale . While chemicals companies on the list include Linde , Air Liquide and BASF . "This list should be viewed as an inspiration and not investment recommendation," Saxo Bank said. It said the basket had delivered a 171% total return since Jan. 2016 (compared to 78% for the MSCI World index) and was currently 7.5% higher, year-to-date. 'Inflationary pressures … not seen in a generation' Inflation, or the prospect of it, is a hot topic in the U.S. right now as President Joe Biden's $1.9 trillion fiscal stimulus plan edges closer to being passed by Congress . The plan has not met with universal approval, with former U.S. Treasury Secretary Larry Summers warning last week that the stimulus could trigger "inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability." "You just see the signs everywhere: Inflation is really building," Garnry said. In the U.S., for instance, figures from the Labor Department last month showed that its consumer price index increased 0.4% in December after rising 0.2% the month before. Read more: This group of inflation-levered stocks could have 20% upside, Morgan Stanley says Garnry highlighted several sources of inflationary pressure including: global supply chains under strain, U.S.-China tensions still in play, rising input costs (which increase the cost of production) and shipping costs, as well as uncertainties over trade, as being seen between the U.K. and European Union now after Brexit. Most inflationary pressures are currently being seen on the supply side, he said, which means that profit margins should not be squeezed too much as the companies can raise prices. "But I think it will get increasingly difficult as we move forward in time because then you'll have real demand-driven inflationary pressures and, if input costs are rising more aggressively from the current levels that we're seeing, it will get more difficult because you also have competition — so the companies that are able to not pass forward these prices will gain market share," he said. Then, he added, rising input costs could begin to impact margins. "It's definitely something we have to have a look at in terms of gauging where profit growth will be over the next five years. It is a worry and there are so many signs of these inflationary pressures that if you're an investor and you're not focused on these, then I think you're making a very big mistake," Garnry said.

An attendee passes in front of John Deere brand tractors displayed during the World Agriculture Expo in Tulare, California, on Tuesday, Feb. 12, 2019.

Patrick T. Fallon | Bloomberg | Getty Images

Peter Garnry, head of equity strategy at Saxo Bank, said in a recent note that while the "classic hedges against higher inflation are gold, inflation-protected government bonds and energy … the equity market also offers interesting alternatives."

"There's so much stimulus coming and the tight coordination between fiscal and monetary authorities is definitely playing into the hands of equities at this point in time, until we get to a certain interest rate level when things will begin to change," he told CNBC's "Street Signs Europe" on Monday.

Garnry named a number of stocks that the bank thinks will benefit from reflation — a move higher in growth and prices — which he described as "the most important" market theme of the next 12 to 18 months.