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(BFM Bourse) – The rise in prices is stronger and longer than expected. The cost of living increases month by month, while growth shows signs of weakness. The combination of these two phenomena raises the specter of “stagflation” which combines inflation and economic stagnation. In this context, what actions could overcome this inflationary turbulence without too much damage?
The French economy should go through a difficult period, admits Economy Minister Bruno Le Maire. The latter stressed in early May that France was “facing considerable economic difficulties.” Prices continued to rise in April, to +4.8% in one year, after +3.6% in February and +4.5% in March. Inflation should continue to accelerate and could reach 5.4% annually in June. Furthermore, French economic growth is stagnant and is expected to increase slightly by 0.25% in the second quarter.
In the United States, inflation is also at the center of all concerns and, in particular, of the US Federal Reserve. In March, it accelerated to 8.5% year over year, a level not seen in 40 years, according to data from the Bureau of Labor Statistics. In April, inflation fell very slightly to 8.3% annually. Although the rise in prices continues to be stronger and longer than expected, the Fed has just started a monetary tightening in an attempt to regulate a galloping rise in prices, accentuated by the Ukrainian conflict. Because in the face of rising inflation, central banks end up raising interest rates with the risk of really slowing down already slow growth.
All the elements are in place to see the risk of “stagflation” taking hold in world economies. The acronym for “stagflation” – a contraction of the terms “stagnation” and “inflation” – smacks of the 1970s when oil shocks sent prices soaring and created the first budget deficits.
The first hints of the term “stagflation” appeared in the 1960s, long before the first oil shock of 1973. On November 17, 1965, Iain Macleod, an MP from the British Conservative Party, was the first to utter the word ” stagflation” to describe the economic situation on the other side of the Channel. “Now we have the worst of both worlds: not just inflation on one side or stagnation on the other, but both at the same time. We have a kind of ‘stagflation’ situation,” he told the House of Commons.
“Pricing power” values, anti-stagflation shield but…
In such a context, companies are not all housed in the same boat. Inflation is increasingly becoming a discriminatory factor for listed companies. Deux choix s’imposent à elles: soit they are prennent de plein fouet la hausse des prix avec le risque de voir leurs marges rognées, soit they are in the capacity of fixer leurs prix et de les imposer à leurs clients sans que cela n’affecte the demand. These companies have a power that is not magic, but “pricing power”.
Stocks in the luxury sector are the champions in this area, with price being an effective lever to maintain the desirability of the products sold. The more expensive the coin, the greater its power of attraction. Companies in this sector, particularly in France, have built their reputation on this premise. Historically, LVMH, Hermès and Kering have strong pricing power. With a nuance, this sector is very exposed to China and therefore to a tightening of local authorities on the consumption of high-end products as well as health restrictions in the country. In addition, the stock market behavior of LVMH (-21.90%), Kering (-36%) and Hermès (-32%) since the beginning of the year attest to the strong weight of the Chinese economy in their activity.
Essential tech brands like Apple or Microsoft regularly manage to raise their prices. The latter is also a marketing argument for the Apple brand. UBS analysts ranked Apple among the 10 US-listed companies that currently have the most pricing power. However, the group is not immune to falling markets. Like other tech stocks, the Apple brand is sensitive to interest rate tightening. Since its record high on January 3, Apple’s capitalization has melted by nearly $700 billion, losing its crown as king of world capitalizations to Aramco, the Saudi oil giant!
Industrial Stock Revenge
The power of “pricing power” is not specific to the luxury sector, nor to technology, as many industrial stocks follow this same mechanism to preserve their margins. Glass container specialist Verallia was able to increase its own prices by 10% without losing customers. Since its last (excellent) quarterly publication, the title of European leader and third world producer of glass containers for beverages and food products has taken its revenge with a gain of 15% on the stock market.
However, the case goes back a long way, the group concentrates the concerns of investors at the same time as it is a large consumer of raw materials (gas, electricity, glass sand). His usual bill represents almost 20% of the turnover, enough to fuel fears about the glazier.
Little known to the general public, SergeFerrari Group is also a master of the art of “power pricing”. The company, which produces composite fabrics for lightweight architecture, posted a very good first quarter. Under the effect of a rise in sales prices, the Dauphinois group can afford to raise its annual target and thus aim for double-digit growth this year.
We can also mention Rexel, whose price effect did not in any way harm the distributor’s customers specialized in energy-related products and services at the beginning of the year. Better yet for Rexel, the ongoing tensions in the supply chain are an opportunity for the group to continue “helping its customers deal with product shortages and labor availability, allowing them to increase their operational efficiency,” he underlines. the group. Their order books are also increasing in major countries due to sustained demand. In addition, the group’s recent departure from the stock market places Rexel as a potential candidate to enter the CAC 40, of which it has recently joined the prelude, the Next 20.
French-speaking chemical players Solvay and Arkema have also been smart to integrate cost increases into their selling prices. On the occasion of its quarterly review at the beginning of May, Arkema announced a price effect of +31.5% (!), which reflects, according to the group, its ability to “affect the sales prices of its special materials the same strong inflation of raw materials, energy and transport, as well as the best conditions in the acrylic upstream”.
This barrage of periodicals placed under the banner of inflation gives a first indication of the ability of companies to impose price increases on their customers without losing them. But “pricing power” is not everything, the market environment can play spoilers like Apple or luxury stocks to name a few…
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