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27-09-2023, 08:34 AM
I would like to share the following from my blog article at i4value.asia "Investing in a high inflation environment"
There are 2 aspects of fundamental analysis - company analysis and valuation. Valuation is based on how the company will perform in the future. While we do not have a crystal ball, looking at how a company had performed historically can provide insights into its future.
That is why I believe company analysis and valuation go hand in hand.
The challenge in a high inflation environment is that determining how the company will perform in the future is not so clear. The future is different from the past. This is especially if the company has no history of operating in such a high inflation environment.
This is especially true for most US and ASEAN companies. I don’t think we will end up like Venezuela (2,300 + % inflation in 2020) or Zimbabwe (557 % inflation in 2020). But I am sure we will be looking at high single digits in the coming one or two years.
I hope this article gives you some insights when assessing companies going into such an environment. The main point is that it is not so simple to forecast the impact of high inflation on the value of a company as there are many moving parts.
We don’t know how high the inflation rate will go or how long it will last. Worse still, we do not know what the various counter inflation measures will do to the economy.
That is why I believe that companies with the following characteristics are the ones that will do well in a high inflationary environment:
- High ROE with low capital needs.
- Financially sound.
- A management team with a good track record.
There are 2 aspects of fundamental analysis - company analysis and valuation. Valuation is based on how the company will perform in the future. While we do not have a crystal ball, looking at how a company had performed historically can provide insights into its future.
That is why I believe company analysis and valuation go hand in hand.
The challenge in a high inflation environment is that determining how the company will perform in the future is not so clear. The future is different from the past. This is especially if the company has no history of operating in such a high inflation environment.
This is especially true for most US and ASEAN companies. I don’t think we will end up like Venezuela (2,300 + % inflation in 2020) or Zimbabwe (557 % inflation in 2020). But I am sure we will be looking at high single digits in the coming one or two years.
I hope this article gives you some insights when assessing companies going into such an environment. The main point is that it is not so simple to forecast the impact of high inflation on the value of a company as there are many moving parts.
We don’t know how high the inflation rate will go or how long it will last. Worse still, we do not know what the various counter inflation measures will do to the economy.
That is why I believe that companies with the following characteristics are the ones that will do well in a high inflationary environment:
- High ROE with low capital needs.
- Financially sound.
- A management team with a good track record.