Commodities sector gains amid higher inflation

The increasing inflation rate signals the economy is expanding and sectors linked closely to economic growth are expected to fare better


PLANTATION counters are an investment thematic investors should consider in a high inflation cycle, as the sector is expected to fare better due to its ability to support economic growth and have more pricing power.

Malaysia’s Consumer Price Index (CPI) increased by 4.7% in April, which is the highest rate since 2018 due to a spike in crude oil prices. The anticipated rise in economic activity this year is fuelling a price upcycle for many commodities with Brent crude oil contract trading at US$70 (RM289) a barrel as air travel and tourism sector show signs of recovery while edible oils like crude palm oil (CPO) price is trading at RM4,000 a tonne levels due to bullish demand supply fundamentals.

Bank Islam Malaysia Bhd economist Adam Mohamed Rahim told The Malaysian Reserve (TMR) besides plantation, investors should also focus on other cyclical sectors such as financial service and consumers despite the government move to tighten movement orders recently due to surge in Covid-19 infection numbers across the country.

“The increasing inflation rate signals the economy is expanding and therefore, sectors linked closely to economic growth are expected to fare better,” he said.

Sectors that could chart further growth such as technology remain an option for investors due to its stellar performance during the pandemic but it may be harder for the sector to sustain its past levels of earnings growth as lockdown eases.

He said diversification is the main objective amid the volatility in the markets.

Although the increase in vaccination rates across the globe has exerted downward pressure on rubber glove counters, he urged investors to not completely dispose off their exposure in the sector.

“Perhaps, the exposure in such sectors can be maintained but at a lower exposure as there are still some prospects as Covid-19 cases remain high for certain countries such as India.

“Excess cash can be parked into sectors that will benefit from a major economic reopening such as construction,” he added.

Aberdeen Standard Islamic Investment (M) Sdn Bhd CEO Gerald Ambrose said investors can hold on to mining and metals counters amid the inflation due to pricing power the sector is enjoying.

He added it would be best to shed companies with high debt and weak free cashflows.

“The best investment strategies in the event of inflation would be to invest in companies with pricing power, good profit margins and high returns on equity. That is, companies with a clear competitive edge that will be able to raise prices without losing customers,” he said.

MIDF Amanah Investment Bank Bhd (MIDF Research) VP and head of research Imran Yassin Mohd Yusof stressed that although inflation was high in April, it does not mean the country is going through a high inflation environment.

Amid the high inflationary cycle, he said investors should manoeuvre their investments by looking at asset classes that outperform the market.

This move includes making an investment in inflation hedging assets, such as gold, and sectors that will benefit such as oil and gas as well as plantation due to the higher commodity prices.

“Real estate investment trust (REITs) and exchange-traded funds are also potential asset classes that can be looked at.

“We do note that REITs may not be the case at current juncture given the impact of the pandemic especially retail REITs, but investors could look at industrial REITs where the impact of the various MCOs is expected to be lesser,” he told TMR.

In a recent note, MIDF Research highlighted the main upward pressure towards the CPI came from key groups such as transport which was up by 27% year-on-year (YoY), housing and utilities (+3.1% YoY) and food and non-alcoholic beverages (+1.9% YoY).

Prices of fuel-related items also continued with double-digit growth as it registered an increase of 59.2% YoY, reflecting the movement in domestic retail fuel prices with prices of RON95, RON97 and diesel rising by 62.4% YoY, 66.5% YoY and 53.6% YoY respectively.