Which companies could perform well if inflation persists?
First, we look at companies with superior pricing power. A good example is Microsoft, one of our top 10 holdings, which recently said it would raise its prices by 15pc to 20pc next year. Unilever, by comparison, plans to increase prices by 3pc to 4pc. You can see there is a magnitude of difference when people talk about pricing power.
Second, we look for companies with a high gross profit margin – which means the external costs of running the business are much lower compared with how much they make via sales. Unilever’s gross margin is 40pc, so 60pc of its income is paid to suppliers. Microsoft’s gross margin is 70pc.
If there is persistent inflation Unilever is, at best, going to protect its profit. It is not going to make more money. Microsoft, in comparison, can, and probably will, make more money.
You were concerned market bubbles were forming. Is this still the case?
I believe there is a mini-bubble in “growthy” technology companies that don’t post much or any profit. For example, we consider most of the companies that Ark Invest, a firm that focuses on buying innovative companies, owns as being in a mini-bubble, such as robotics, DNA sequencing and AI stocks.
A lot of these shares have sold off recently. They could have further to go because they are low-quality businesses. A lot of companies should not be trading at these levels.
I don’t understand why Apple’s share price has done so well. In terms of the fundamentals, it does not look attractive.
