What are the best UK stocks for beating inflation?

| January 14, 2022

  • A thriving royalties mining stock heavily invested in cobalt for batteries and renewable energy technologies.
  • The UK’s largest bank, ready to surge its interest income.
  • A real-estate business accelerating its expansion off ecommerce tailwinds.

Inflation is a pretty serious problem for UK savers, but there are numerous stocks out there capable of beating it. Last November, the Office for National Statistics found that inflation has risen to 5.1% – the highest rate in over 10 years.

For those keeping money in the bank, cash is losing value quickly. But fortunately, there are numerous ways to protect wealth against inflation. One of which is to invest in businesses that are actually primed to benefit from the rising prices.

Historically, three sectors tend to do well during increased inflationary environments: commodities, banking, and real estate. With that in mind, let’s look at my top picks from each industry for the best UK stocks for beating inflation.

A UK mining stock for inflation

It’s hardly a secret by now that when inflation goes up, so does the cost of living. Suddenly everything is much more expensive. But it’s not inflation directly driving up these costs, but rather the price of raw materials going up. To protect profit margins, product manufacturers exercise whatever pricing power they have to pass on the increased expense to consumers.

So, it’s hardly surprising that mining companies have historically thrived during inflationary periods. After all, as mining is largely a fixed-cost business, profits expand if metal prices start to rise. 

There are plenty of UK mining stocks out there capable of beating inflation. But my personal favourite, and one I hold in my own portfolio, which I’ve discussed in greater detail for The Money Cog Premium members, is Anglo Pacific Group (LSE:APF).

This isn’t a traditional mining company because it doesn’t actually do any mining. Instead, it provides funding for other mining companies like Rio Tinto to develop new mining sites worldwide. In exchange, Anglo Pacific receives a portion of the extracted metals as a royalty payment.

This approach is less risky and doesn’t expose the group to the arduous process of exploration, discovery, legal permits etc. But it still has to contend with the usual risks of any mining business. While commodity prices may be heading up at the moment, that may not always be the case. And if they take a downturn, the group’s profits will follow suit.

Nevertheless, I believe this is one of the best UK stocks for beating inflation.

What inflation means for interest rates

Banks are pretty complex organisations. But the general business model for any commercial bank is to accept deposits and then use that money to issue loans to individuals or businesses. The common type of loan people are familiar with would be a mortgage on a home. The bank then charges interest on the borrowed amount, which is how it profits from the transaction.

What does this have to do with inflation? Directly, nothing. Indirectly, everything. A small amount of inflation is actually quite helpful in stimulating economic growth. This is why the Bank of England (BoE) and other central banks have an inflation target of around 2% a year. But too much inflation, like we are seeing right now, causes a crisis. 

To counter this, the BoE can and has decided to increase the London Inter-Bank Offered Rate or LIBOR. This is a bit of a complex topic. But in oversimplified terms, this is the interest rate banks pay when borrowing money from each other and the BoE. As this interest rate increases, borrowing money becomes more expensive, and the increased costs are, in turn, passed onto customers through higher interest rates on issued loans.

A UK banking stock versus inflation

Suddenly, lending money becomes a lot more profitable. And that’s fantastic news for Britain’s largest bank Lloyds (LSE:LLOY). With interest rates on the rise, the income generated from its lending business is set to expand, taking its share price with it, in my opinion.

But this anti-inflation investment is not without its risks. The pandemic is still ongoing, and with infection rates near all-time highs, there is current speculation of another potential lockdown. Suppose that were to occur, and businesses along with consumers start missing interest payments as they did in 2020. In that case, Lloyds’ profits could end up going in the wrong direction.

Having said that, I feel this is a risk worth taking. And with £50bn of cash on its books, Lloyds should be capable of surviving another lockdown. That’s why it’s on my list as one of the best UK stocks to beat inflation.

Real estate is on the rise

The third and final sector that tends to perform well during times of high inflation is, oddly enough, real estate. While affordability may drop due to higher interest rates on mortgages, property values tend to rise more thanks to inflation.

The real estate sector is vast, with plenty of avenues to walk down. Personally, I’m drawn towards the commercial end of the spectrum rather than residential. One UK stock that I think is particularly well-suited to beat inflation and thrive long-term is Warehouse REIT (LSE:WHR). 

Premium members of The Money Cog know this business all-to-well, as I’ve discussed it before. This company has a vast portfolio of warehouses scattered across the UK in prime locations. 

With online shopping becoming ever more popular, the demand for well-positioned warehousing has skyrocketed. And companies like Amazon and Screwfix are willing to pay a premium to continue having access to these order fulfilment facilities.

This boost in pricing power, combined with rising property values, has put Warehouse REIT in a desirable position. And that’s why I think it could be another top UK stock for tackling inflation in my portfolio.

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Zaven Boyrazian owns shares of Anglo Pacific Group. The Money Cog has published investment reports on Anglo Pacific Group and Warehouse REIT. Views expressed on the companies, assets, and strategies mentioned in this article are those of the writer and, therefore, may differ from the opinions of analysts in The Money Cog Premium services.

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