‘We scoured the world for the best inflation hedge: this is the stock we found’
This business doesn’t even need ‘pricing power’: its revenues will rise automatically in line with increasing prices in the shops
Today we offer readers not only the first in a new series of American stocks but one that is, in the words of a fund manager who owns it, “the best hedge against inflation we could find anywhere”.
To recap, we said last week that we would tip US shares in our Wednesday column for the next few months because of our conviction that in a world of high inflation and political turmoil the dollar would remain investors’ key safe haven. This, for British savers, will support the value of any dollardenominated assets they own and thereby give them a following wind in their own battle to keep their wealth ahead of inflation. We asked one prominent fund manager who, while he has a global mandate, holds a large number of American shares to identify the one stock he felt would best protect against inflation. That investor, Stephen Yiu of the Blue Whale Growth fund, says: “We also believe that the pound is likely to be weak against the dollar for the next few years – currency weakness, expensive imports and high inflation act to reinforce each other.
“We asked ourselves: of all the stocks in the world, which are best positioned to see their revenues rise in line with inflation? Our answer: the credit card processors Mastercard and Visa. Their income is a percentage of the nominal amount that cardholders spend and those nominal amounts will automatically rise in line with inflation.”
We can immediately see the genius of this insight. While this column has discussed endlessly the concept of pricing power since inflation began to climb, and debated which companies are best placed to pass on rising costs to their customers, Visa and
Mastercard don’t even need to raise their prices in order for their revenues to rise: they can leave their percentage commissions as they are and see their income increase as the people who use their cards find their bills rising in shops, restaurants, petrol stations and everywhere they spend.
“It’s actually even better than that,” Yiu adds. “Visa and Mastercard’s own costs are substantially fixed; it’s not as if they have to buy a lot of raw materials. They are essentially tech companies – they have built big systems to process huge numbers of payments but maintaining those systems costs the same no matter how much money goes through them.”
This column has already tipped Visa; we advised readers to buy about two years ago, since when the shares have gained 25pc. We’ll stick with Visa but now advise readers to buy Mastercard too. Yiu says its prospects are slightly better – “its technology is superior and as the smaller of the two companies it has more scope to grow” – although it is slightly more expensively valued.
“Mastercard is a high-quality business benefiting from the shift of payments away from cash to mobile, online and contactless transactions,” Yiu adds. “At its core, Mastercard runs Banknet, a global payment network connecting major banks for verifying and processing card payments. Mastercard is able to process hundreds of millions of transactions per day thanks to its superior technology.
“Now it is seeking to extend its success in consumer payments to business-to-business transactions, many of which are still made by cash or cheque, and we are confident in its ability to execute on this multidecade opportunity. And whereas most tech companies benefited from the pandemic, Mastercard suffered from travel restrictions limiting crossborder transactions, reducing its cut of exchange rate profits. As the world opens up, this important aspect of its business will restart.”
Because of the key role of the exchange rate in our case for buying American stocks we will quote the sterling equivalent as well as the dollar share price with each tip. This will allow readers to keep better track of the progress of our suggestions.
Questor says: buy
Ticker: NYSE: MA
Share price at 5.45pm: $359.25 (£284.80)