The US Federal Reserve will continue to raise interest rates
Because one thing is certain: the Fed will continue to take decisive action against persistently high inflation. Fed Chairman Jerome Powell emphasizes this again and again: “The US Federal Reserve is ready to increase the rate of interest rate hikes again if the economic data so require,” Powell said recently before the US Senate Banking Committee. It is likely that the key interest rate will be raised again by 50 basis points at the next Fed meeting. Because in the USA there is a robust labor market with few unemployed. Inflation won’t come down. As a result, interest rates continue to rise and will remain high. That’s why fear is coming back into the market. But: Fear is good for us as value investors, because if the market gives way, even quality stocks become cheaper again – and you can buy again.
Fed and ECB must hurt the economy
But back to the Fed. In order to shake the core of inflation, it has to hurt the economy. Only then will inflation come down. And the central bank can only achieve that if it keeps raising interest rates and then keeps them up for quite a while. Then consumption will suffer and with it the sales and profits of companies. Sounds tough, but it’s probably the only way to get the inflation problem under control. The same applies to the ECB. It will also continue to raise interest rates. When the Governing Council meets for its interest rate meeting in the coming days, a rate hike of 50 basis points is almost a given.
The new reality: sales up, profits down
The consumer goods group Henkel has just shown how much inflation affects companies. Here you can see an example of what many companies are currently presenting in their quarterly figures: Sales are increasing, but profits are falling. In the past 12 months, Henkel’s sales increased by 12 percent to 22.4 billion euros, while net income fell by 23 percent to 1.26 billion euros. Now one would think that Henkel, with its products such as “Persil” or “White Giant”, has sufficient pricing power. But the Düsseldorf company had to contend with additional costs of around 2 billion euros for freight, raw materials and energy. At the same time, many consumers are more reluctant: they choose cheaper private labels with similar quality. Henkel simply does not have an economic moat around the business model from which pricing power results.
Microsoft has true pricing power
So what to do? For our mandates, such as Frankfurter Aktienfonds für Stiftungen and Frankfurter UCITS-ETF – Modern Value, we are looking for companies that can push through price increases on the market. One example is our portfolio value Microsoft, which just as of March 1st raised its prices by 10 to almost 20 percent. Customers had no choice but to pay for it. The switching costs to other providers would have been far too high. That’s what we call true “pricing power”!
Our new portfolio stock SCOR looks similarly positive, but for different reasons than Microsoft. The French insurance group has a new CEO and is delivering good figures, as the latest annual and quarterly balance sheet shows. The stock is cheaply valued at a P/E of 6 and pays a high dividend. The dividend yield is around 6 percent. For us as value investors, these are solid basic requirements for investing, because we see the company well positioned in the reinsurance industry for the years to come.