If you live in America, I am sure you are aware that inflation is not just coming but is already here and strengthening. If you’ve bought anything recently, you don’t need the media to tell you that prices are going up but, just in case you missed it, prices are going up. Mainstream news is now following financial news in making that a backdrop to a lot of domestic stories, with the occasional breathless feature about “shocking” price hikes. The danger for stocks is that rising prices prompt interest rate hikes. After years of ultra-low rates, the adjustment should that happen would be drastic, and when rising input costs and therefore squeezed margins are added to the mix, earlier or bigger than expected rate hikes could prompt a big selloff.
There are, however, some stocks that will benefit from both higher prices and higher interest rates. Credit card and payment processing companies charge merchants a percentage of each transaction and charge consumers interest on outstanding balances, hence will make more money if both prices and rates climb.
It isn’t quite that simple, of course. Consumers only have so much to spend and won’t necessarily spend more as prices rise; they may just cut back on their spending. If rates move up, it will slow the economy as a whole, which is not good for any company connected to retail. Even so, the prospect of inflation and rate hikes will have investors searching for stocks that can outperform in that scenario but have underlying factors that will enable them to still post decent gains should things prove to be better than expected.
That is where credit card companies come in. They can benefit from higher prices and interest rates should they come, but if things calm down, they can continue to benefit from a longer-term dynamic. The ongoing global shift to e-commerce means a shift to card payments, too. You can’t pay Amazon with cash; cards are essential. The most recent McKinsey Global Payments Report, for 2020, underlines that. There was an understandable contraction last year, but global payments revenues nearly doubled from 2010 to 2019 and are expected to resume strong growth over the next few years.
That is why I have been bullish on these stocks for a while. They are a long-term play on growth and a fundamental shift in retail habits. Right now, though, they are also a place that a lot of investors will go to hide from possible disruption as well. Stock picking is not always about finding companies that will do well. Sometimes it is more about anticipating where money will flow, and simple logic says that the likes of Visa (V), MasterCard (MA), Amex (AXP), Global Payments Network (GPN), and Square (SQ) will be beneficiaries of that over the next few months.
If you are worried about inflation and possible rate hikes, you could just split an investment between all the above but there is another way to play this that has a couple of other advantages. The ETFMG Prime Mobile Payments ETF (IPAY) includes all five stocks mentioned in its top ten holdings, but also gives exposure to other, not necessarily card-driven payments systems such as PayPal, more advanced fintech names like Fiserv (FISV), and the currently trendy “buy now, pay later” business through stocks like Affirm (AFRM). Also, commodity and input price-driven inflation such as we are seeing now isn’t just a national thing. It affects the entire world, so the fact that around 30% of IPAY’s holdings are outside the U.S. is another reason to favor it over single stock investments.
In a worst-case scenario, where inflation really takes hold and the Fed forcibly slows the economy with big rate hikes, there won’t really be any place to hide, but that is unlikely. More probable is that inflation will settle down and the Fed will make gradual adjustments until monetary policy is “normal,” or neutral, and in that situation, payment stocks that will benefit will attract buyers. Gaining exposure to that market through IPAY is a defensive move for investors in the inflationary and rising rate environment.
Do you want more articles and analysis like this? If you are familiar with Martin’s work, you will know that he brings a unique perspective to markets and actionable ideas based on that perspective. In addition to writing here, Martin also writes a free newsletter with in-depth analysis and trade ideas focused on just one, long-time underperforming sector that is bouncing fast. To find out more and sign up for the free newsletter, just click here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
www.nasdaq.com