Disrupting Inflation: Innovative Companies Can Light the Way

Inflation and rising interest rates have prompted many equity investors to reconsider technology and high-growth companies. But this inflationary environment is different, and so are the companies best poised to rise above it.

It’s been a while since rising costs shadowed global equity markets. Some inflation—and rate hikes—are typical in an economic recovery. But after US consumer prices jumped 6.2% in October, the biggest annual inflation surge in three decades, investors sense that it may persist. In fact, the 10-year break-even rate, which gauges investor US inflation expectations for the next decade, reached 2.70% in November—its highest since 2012.

Inflation Pressures May Be Stubborn, but Positive for Disruptors

Historically, inflation and rising rates are no friend to high-growth companies, whose valuations are based on the present value of future earnings. But we believe that the type of inflation unfurling in the post-COVID-19 global economy may add an impetus for high-growth, disruptive companies to outperform.

Some inflationary pressures may be temporary, especially those sparked by shortages due to production shutdowns during COVID-19. And as economies gradually reopen, most prices should normalize as supply and demand dynamics start to rebalance.

Inflation may be more permanent, however, in other corners of the economy where changes are more lasting and impactful. Labor, materials and energy, for instance, were already experiencing steady pre-pandemic shifts that were accelerated by the crisis. And with higher costs likely to persist across the economy, new and industry-changing business models are needed to overcome the added pressures. This is good news for investors who see disruptive innovation as more than a necessity, but an opportunity to invest in tomorrow with significant growth potential today.

Disruptors Target a Changed Workforce and Sticky Wages

Rising labor costs are as much the product of soul searching as job hunting. Wages normally lift when economies rebound, as more people change jobs and companies compete for replacements with higher salaries. But this isn’t a typical hiring boom and the labor market will be forever altered when the dust settles.

Work from home, for example, has changed the way people think about their livelihoods. What started as a smart safety precaution during COVID-19 is now a must-have perk for millions. Many would rather switch jobs than return to offices now. Others are rethinking their work-life balance or early retirement. These and other sobering trends help explain why a record 3% of US workers voluntarily quit in August.

Many job shifters are jumping into the “gig economy,” which ballooned by 2 million people in the US in 2020. Independence, flexibility and some benefits are among the top attractions for gig workers, which number 1.1 billion worldwide. By 2023, projected gross volume of the global gig economy could reach US$455 billion, according to Statista research. These shifting labor dynamics provide fertile sources of labor for companies such as Uber Technologies, Lyft and DoorDash, or more users of online job platforms such as Glassdoor, Indeed and Fiverr. And with new-business startups at an all-time high—4.4 million in the US in 2020, according to the US Census Bureau—demand is surging for innovative recordkeeping and cloud solutions for small businesses, provided by companies such as Bill.com and HubSpot. Worker shortages have especially grown in manufacturing and transportation in recent years (Display).