• Roger chats with Gary Rollo to discuss why Megaport is a holding in the Montgomery Small Companies Fund. Watch here.

The industries outperforming when inflation is high


The industries outperforming when inflation is high

In this week’s video insight Roger identifies why it is important for investors to contemplate the implications for investment markets of the conflict with Russia and Ukraine resolving quickly or being long and protracted. According to research conducted by UBS, in past periods when inflation is high and growth slows to a moderate level the U.S. industries that historically outperformed the market were Food Staples & Retailing, Hygiene, Healthcare and Personal Products, Pharma and Biotech, Food and Beverages, Banks, Real Estate & Energy.


Roger Montgomery:

Hi, I’m Roger Montgomery from Montgomery Investment Management and welcome to this week’s video insight.

I don’t purport to know how nor when the current conflict in Ukraine will be resolved. I am also not going to pretend to be able to divine the outlook for inflation nor economic growth.  Despite the inadequacies, I do think investors should at least contemplate the implications for investment markets of both a short conflict and a more protracted one.

Even before the war began, markets were processing the inevitability of accelerating increases in rising interest rates alongside the reality of quickening inflation. The post pandemic surge in demand, amid a supply chain unable to keep up has caused inflation rates that have most central banks on the hop.

On the one hand investors are optimistic about rising demand for both goods, and services such as travel, leisure and entertainment, and they take comfort from every reference the US Central Bank makes to “financial stability” – which of course is code for supporting equities. On the other however investors are pessimistic about the implications for valuations from inevitable increases in interest rates and from a possible economic slowdown.

Already inflation expectations, as measured by 10-year breakeven yields, are at the highest level on record. Meanwhile, a slowing economy – thanks to constrained supply of commodities and declining consumer confidence – is an increasing probability.

Of course, the combination of high rates of inflation and slowing economic growth has led many to raise the prospect of stagflation and its impact on markets. 

Timing markets successfully consistently is frightfully difficult if not impossible. Jumping to cash is therefore dangerous. In any case, returns from equities have proven to be superior to cash over the long-term, and even during the two world wars equity returns (as measured by the Dow Jones Industrial Index) were positive

What an investor can do however is ‘tilt’ or ‘shape’ their portfolio. One might, for example, reduce the proportion of ‘moon shots’ (which should also be relatively small) and increase the proportion of high-quality businesses with pricing power – those with inelastic demand for their goods or services, and those able to pass on to consumers, the higher costs of production and supply). 

History also suggest some sectors fare better than others.

According to recent research conducted by UBS, in past periods when inflation is high and growth slows to a moderate level the US Industries that historically outperformed the market were Food Staples & Retailing, Hygiene, Healthcare and Personal Products, Pharma and Biotech, Food and Beverages, Banks, Real Estate & Energy. Meanwhile, industries that underperformed were Communication Services, Info Technology, Autos, Insurance, Capital Goods and Utilities.

UBS also dug a little deeper to explore which sectors witnessed the most significant changes in returns when the economy moved from a high growth/high inflation environment (which is where we have just been) to high inflation/low growth world. UBS found Energy & Materials (watchout Woodside and BHP!), Tech, and Retailing, and Autos and Consumer Durables see a sharp deterioration in returns. So called defensives sectors such as Food & Beverages, Pharma, and Financials produced the best relative returns. If another step down in growth is experienced – and stagflation becomes a reality – all sectors lose ground, including defensives, but returns in Tech, Energy and Real Estate fare the worst.

A protracted battle in Ukraine, which appears most likely, could trigger sustained increases in the prices of some commodities, but more importantly constrain supply. It’s encouraging to know there are some sectors that can protect and even grow in value in such an environment, and that may just be enough to prevent the mistake of rushing to the exits.


Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than three decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

Why every investor should read Roger’s book VALUE.ABLE


find out more



  1. could it be that commodities are a place to look to hold value in this environment
    if a company with an advantage of scale, as in large commodity companies, don’t spend any capex [ bring on more supply]and exploit the price .
    will they not be a place to look?

    while short term thinking, a lot of sectors will fall , and even if their growth is modest it may be a better place to look .

  2. Another consideration is that “official” inflation rates significantly understate actual inflation. For example, house price increases and the shrinking packet sizes “shrinkflation” are excluded from official inflation measures.

    As inflation rates continue to spike, it’s important to remember that CPI indexation (e.g. from regulated assets) won’t necessarily protect you.

Post your comments