With a persistent inflationary backdrop, pricing power is crucial to protect a firm’s margins and returns: this underlines the importance of seeking companies with strong pricing power.
- Higher and longer lasting inflationary pressures globally are putting downward pressure on the margins of companies with weak pricing power.
- It is unclear how long this higher and stronger inflationary pressure will last, but there is a risk of generally stickier inflation.
- There is a risk that inflation shifts from being frictional to becoming structural, if wage inflation picks up.
- Investors need to focus on retaining or gaining exposure to companies with stronger pricing power.
- Companies with stronger pricing power will have more potential to protect margins from inflation’s downside pressures.
- Gross margin trends can be a good indication of a company’s pricing power.
- Our long-term unconstrained strategies always focus on companies with strong pricing power. They show superior pricing power compared to the broader market, both when assessed through our proprietary analytical framework, and when looking through the gross margins lens.
As investors and fundamental analysts, we have always put emphasis on companies that are in a position to have strong pricing power, which for most of the past three decades has been related to an environment of low inflation, or constant deflationary trends in certain industries. Finding companies with pricing power in that context gives investors the potential to find companies that can either grow their margins, or protect them from constant erosion.
Globalisation, faster speed of innovation, and constant competitive pressures have tended to bring an underlying deflationary trend to many industries over the past two-three decades, which again led to the importance of pricing power for businesses operating on the global scene.
At the same time, pricing power is also important to protect companies from periods of strong inflation, such as the period we have been going through since the global pandemic crisis.
Pricing power is also important to protect companies from periods of strong inflation, such as the period we have been going through.
Important Information
This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’), authorised and regulated by the Financial Conduct Authority. It does not constitute investment advice. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
The information contained in this document has been compiled with considerable care to ensure its accuracy. However, no representation or warranty, express or implied, is made to its accuracy or completeness. Martin Currie has procured any research or analysis contained in this document for its own use. It is provided to you only incidentally and any opinions expressed are subject to change without notice.
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Past performance is not a guide to future returns.
Risk warnings – Investors should also be aware of the following risk factors which may be applicable to the strategy shown in this document.
- Investing in foreign markets introduces a risk where adverse movements in currency exchange rates could result in a decrease in the value of your investment.
- This strategy may hold a limited number of investments. If one of these investments falls in value this can have a greater impact on the strategy’s value than if it held a larger number of investments.
- Smaller companies may be riskier and their shares may be less liquid than larger companies, meaning that their share price may be more volatile.
- Emerging markets or less developed countries may face more political, economic or structural challenges than developed countries. Accordingly, investment in emerging markets is generally characterised by higher levels of risk than investment in fully developed markets.
The views expressed are opinions of the portfolio managers as of the date of this document and are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. These opinions are not intended to be a forecast of future events, research, a guarantee of future results or investment advice.
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