Our strategists have identified a list of European companies with the best and worst pricing dynamics, which is a good way to play reflation. This is in line with our estimates which keep unchanged the narrative that global growth and inflation will surprise on the upside this year, even more strongly, as the global inflation surprise index has entered positive territory for the first time in two years. Moreover, the index is at 10-year highs for the US, while leading indicators point to further rallies on the way.
In the short term, the expectation of rising inflation should not put too much pressure on corporate earning, due to the strong rebound expected over the next 12-24 months. In the medium term, the power of fixing prices is key in this environment, as it allows companies to pass on the cost to consumers or expand their margins.
Our analysts estimate that almost half of European sectors are raising prices, either to offset higher input costs or to take the opportunity to expand margins. It has already become clear that so far in the current European quarter, margins are clearly surprisingly on the upside. The best positioned sectors are Brands, Insurance, Metals & Mining, Semiconductors, Software, Telecoms, Freight & Shipping and Utility Power Generation, and within them, the best positioned companies are: LVMH, Prada, RWE, EDP, Vodafone, Lancashire, Zurich Insurance, Infineon and STMicro.
Another clear opportunity is in Value-biased names combining good price power dynamics with attractive valuations, namely: Amundi, ArcelorMittal, BATS, ITV, Sodexo, Svenska Handelsbanken, Tesco and Vodafone.
When will the next rotation occur? Well, an environment of macro growth and rising inflation is usually positive for markets and especially for cyclicals. However, when growth (and momentum) start to slow and inflation continues to rise Defensives will start to do better, a likely scenario towards mid-year.