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Fidelity identifies investment opportunities

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As inflation figures for July top 4%, Fidelity has suggested three ways to play rising prices through UK stock market investments.

It has identified three different groups of companies which are insulated against rising prices and at best present an opportunity for superior growth prospects.

Aruna Karunathilake, manager of Fidelity’s UK Aggressive Fund, said: “Inflation, or more precisely, people’s perceptions that prices are rising much faster, is likely to cast its shadow over economies and markets for some time to come.

“Yet UK equity investors can not only protect themselves from higher prices, but also seek to profit from them.

“Defensives are the first group. Some companies either have revenues linked to inflation or have the ability to pass on higher rises to their customers. In the first group are the utilities: their regulatory regime ensures that growth of their revenues is tied to inflation, typically retail price indices which are higher than the consumer price index. These are the equity equivalent of index-linked bonds. National Grid, a top 10 holding, is a good example.

“Resources are the second group. This is the obvious way to play inflation because higher commodity prices are largely responsible for the increase in inflation. Whether we are talking about fuel or food, supply is unable to cope with surging demand from developing countries. Although the price of oil has fallen from its recent peaks, it is still 60% higher than this time last year.

“Finally, second derivatives are the final group. An indirect way to play higher food prices is through the needs of farmers. Demand for fertilisers such as potash has soared along with grain and meat prices. It’s not possible to gain exposure to fertiliser producers through the UK stock market, but using the overseas facility of this fund I have K&S, a German group.”

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