Putnam Large Cap Value strategy | November 14, 2022
We’ve clearly seen that inflation can have wide-ranging effects — from the labor markets to transportation to raw materials and beyond. Surging inflation has broad implications for the global economy. Inflation is likely to stay elevated at least through the end of 2022, and possibly well into next year as the eventual softening in housing prices takes considerable time to bleed into the inflation data.
As portfolio managers, we don’t try to predict the duration or magnitude of inflationary forces. Instead, we focus on how inflation might impact the profitability of the companies we own. Many sectors in our value universe, such as health care, are relatively immune to inflationary pressures. However, companies in some sectors are quite challenged. For example, businesses in consumer staples are facing rising input costs, and these firms will likely try to pass on higher prices to their customers.
We aim to find companies that have pricing power — the ability to raise prices to cover their increased costs without negatively impacting demand. We tend to see pricing power in companies with concentrated end markets — think Coca-Cola or PepsiCo — but for larger discretionary products like furniture and electronics, it depends on whether consumers are willing and able to spend in this inflationary climate.
Putnam Large Cap Value
Invests in large-cap stocks, dividend growers, and cash flow generators with a strategy that defines the value universe every day.
We have also seen retailers cutting prices to move their inventory. We’re mindful of other instances where pricing power will be challenged. For example, we’ve seen banks reporting higher levels of wage inflation. This tends to be a cost that is not easy to pass on, especially in an industry as competitive as banking.
The current macroeconomic challenges affect all companies broadly, but their impact on the consumer sector — particularly the lower end — warrants careful examination. We are considering the impact on retail inventory levels, credit trends, and the sales mix of discretionary and durable items. Also, we are paying close attention to corporate earnings estimates and the potential for downward revisions as the global economy slows in response to aggressive central bank policies.
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