In an era of rising inflation, smart investing demands a keen eye for assets that can hedge against rising prices while generating healthy returns. Freddie Lait, Chief Investment Officer at Latitude Investment Management, believes that a combination of oil giants and European infrastructure stocks offer exactly that combination.
Oil and Gas as a Natural Inflation Hedge
Lait sees stocks like BP and Shell as essential tools in an inflation-resistant portfolio. The historically strong relationship between energy prices and inflation underpins his thesis. With oil prices stabilizing around $85 per barrel and Lait’s forecast of a long-term price of $70-75, he identifies significant potential for double-digit annual returns.
“Even without factoring in growth, I think BP and Shell likely can deliver nearly 15% average capital returns annually through share buybacks and dividends,” Lait asserts. “As a natural hedge within a portfolio, these are the best investments in the current environment.”
His outlook is shaped by years of underinvestment in the global oil sector, where annual capital expenditures have been slashed by half. Even Saudi Aramco, the world’s oil behemoth, has tempered its plans for production capacity increases. Meanwhile, the International Energy Agency projects a steady rise in oil and gas demand, suggesting a bullish supply-demand dynamic for energy stocks.
Industry Views on Energy Investments
Lait’s positive outlook on oil and gas is shared by a number of analysts:
James Ashley, Head of Petroleum Analysis, Goldman Sachs: “Despite the ongoing energy transition, structural underinvestment in traditional energy sources will likely keep oil prices on an upward path, making oil and gas companies attractive.”
Nathan Piper, Head of Oil and Gas Research, Investec: “While investors are increasingly conscious of ESG factors, energy companies that balance responsible investment with traditional operations can provide a valuable hedge in the inflationary landscape.”
Infrastructure: A Long-Term Inflation Defense
Beyond oil, Lait sees European infrastructure giant Vinci as a “phenomenally interesting” stock with strong inflation-linked growth potential. The company’s unique portfolio includes toll roads, civil engineering projects with built-in long-term inflation adjustments, and 70 major global airports.
Lait envisions Vinci delivering 10-12% annual earnings growth, with potential upside tied to inflation levels, along with a healthy 3-4% dividend yield. He emphasizes the company’s attractive valuation compared to comparable infrastructure assets held by private equity, highlighting a “massive arbitrage” opportunity for investors. Additionally, he notes that Vinci benefits from a “no-landing” economic scenario (where recession is dodged but growth continues), presenting added upside if inflation risks re-emerge.
The Infrastructure Investment Landscape
Infrastructure stocks hold broad appeal for investors seeking inflation buffering, but it’s crucial to remember nuances:
Louise Dudley, Global Equities Portfolio Manager, Federated Hermes: “Infrastructure companies with pricing power and contracts linked to inflation rates offer a valuable haven, but thorough due diligence on debt levels is essential, as rising rates can impact profitability.”
Thomas Hayes, Chairman and Managing Member, Great Hill Capital: “Global infrastructure needs are immense, but investors should prioritize companies that demonstrate strong management, operational efficiency, and a clear path to growth alongside their inflation-beating potential.”
Lait’s Takeaway
Freddie Lait’s investment strategy offers a compelling mix of near-term returns and long-term potential. However, as with any investment, consider your individual risk tolerance and objectives: oil investments come with commodity price volatility, while infrastructure stocks may be sensitive to interest rate fluctuations. Thorough research and consultation with a financial advisor will help make your decisions informed ones.
