Berenberg says rising inflation is here to stay — and names the stocks to play it

Published Wed, Apr 14 20212:19 AM EDTUpdated Thu, Apr 15 20214:01 AM EDT

Lucy Handley @in/lucy-handley-b2b0a61a/@lucyhandley

Berenberg has picked a number of stocks it says are "winners" in the face of rising bond yields and inflation, which it expects to increase over the next decade. The bank urged investors to "find ways to hedge higher bond yield risk in their portfolios." The yield on the benchmark 10-year Treasury note was at 1.6252% on Wednesday morning, after key inflation data on Tuesday came in slightly higher than expected and not as bad as some feared. In a note Friday, the bank ran stock screens for regions including the U.S., Japan and Europe and listed its buy-rated picks — all of which have an upside potential of 15% or more. Berenberg's favorite stocks include: Associated British Foods (owner of grocery brands and clothing company Primark) and oil firm BP are picks within Berenberg's screen of large-cap European firms with positive correlations with 10-year German bond yields – the European equivalent of U.S. Treasury bonds. In other words, the stocks performed well when bond yields were rising. The analysts also liked the companies' strong earnings per share (EPS) growth and cashflow. British investment manager St James's Place is a top pick on Berenberg's list of small to mid-cap firms that have positive correlations to 10-year German bond yields. Chemicals firm Asahi Kasei and electronics company Panasonic are favorites in Berenberg's screen for large Japanese companies that have positive correlations with 10-year Japanese bond yields, strong EPS growth and balance sheets. Yamaha Motor is on its list of mid and small-cap Japanese firms with positive Japanese bond-yield correlations. Bank of America and General Motors are top picks in Berenberg's lists of large U.S. firms that correlate positively with 10-year bond yields and have positive EPS momentum and growth. British firms Compass and Barclays are favored picks in Berenberg's list of large U.K. firms with "positive" correlations with 10-year U.K. bond yields, as well as positive EPS growth. "There has been a 40-year downtrend in developed countries' 10-year bond yields. This has coincided with a 40-year downtrend in inflation rates across the developed world," the Berenberg analysts said in the note. "Our economists believe that inflation rates have troughed and will pick up in the next six months, before rising gradually over the next decade. This would imply higher bond yields too." More broadly, they said global sectors that appeared well placed to benefit from these higher bond yields included basic resources, chemicals, banks and energy.

The U.S. Treasury building in Washington, D.C., on Friday, March 19, 2021.

Samuel Corum | Bloomberg | Getty Images

Berenberg has picked a number of stocks it says are "winners" in the face of rising bond yields and inflation, which it expects to increase over the next decade.

The bank urged investors to "find ways to hedge higher bond yield risk in their portfolios." The yield on the benchmark 10-year Treasury note was at 1.6252% on Wednesday morning, after key inflation data on Tuesday came in slightly higher than expected and not as bad as some feared.

In a note Friday, the bank ran stock screens for regions including the U.S., Japan and Europe and listed its buy-rated picks — all of which have an upside potential of 15% or more.

Berenberg's favorite stocks include: