The reflation trade is the hot word on every investor’s lips at the moment.
Reflation refers to the act of stimulating the economy using policies that are meant to counteract the effects of deflation - which happens when the prices of goods and services fall.
Reflation policies are usually (but not always) undertaken following a recession. If successful, they can help expand output, stimulate spending, and curb the effects of deflation.
As you probably know, the U.S. suffered through one of the worst economic shocks in history with the coronavirus pandemic of 2020.
GDP fell off a cliff as businesses were shuttered, which also resulted in price shocks to the downside.
However, in the earliest days of the COVID-19 crisis, the Federal Reserve slashed borrowing rates to zero to shore up the financial system.
It then quickly moved to loosen bank regulations and created numerous lending facilities to support lending during the pandemic. It also began purchasing financial assets to pump liquidity into the markets as well.
The speed and scope of these critical actions likely prevented a financial crisis that would’ve rivaled what happened in 2008-2009.
Of course, in order to pump liquidity into the system, the Fed’s balance sheet had to grow like it never had before. As of this writing, it has ballooned to a record high over $8 trillion.
Extraordinary fiscal policies have been undertaken as well.
There has been the $2.3 trillion CARES Act signed into law on March 27, 2020, the $900 billion stimulus and relief bill signed on December 27, 2020, the $1.9 trillion American Rescue Plan Act signed on March 11, 2021, and several other supplementary relief and stimulus measures.
Combined together, U.S. monetary and fiscal policies have been some of the most potent and effective weapons that have been deployed to combat this pandemic and “reflate” the economy.
And the results are beginning to show.
Jobs are roaring back in a huge way with the unemployment rate declined to 5.2%.
Meanwhile, data from Jefferies also shows that restaurant bookings are up, consumer discretionary foot traffic is up, and U.S. flight activity is up as well.
And the Conference Board’s latest consumer confidence survey showed an above 100 level - among the highest levels since the onset of the pandemic in March 2020.
When you combine all of this data together, it simply adds to evidence of an economy that is not only healing, but is also poised to accelerate its growth through the rest of 2021 and into 2022.
We are now in the midst of a major upswing of the economic cycle where both growth and inflation are accelerating - which will undoubtedly benefit some stocks more than others in the weeks and months ahead. We’ve compiled a list of the best stocks that we believe stand to gain the most from the reflation trade.
Hilton Worldwide (NYSE:HLT)
Acuity Brands (NYSE:AYI)
Restaurant Brands International Inc (NYSE:QSR)
To combat the spread of the coronavirus, nationwide lockdowns and travel restrictions devastated several industries including airlines, cruise lines, and of course, hotels.
Many hotel stocks plummeted in early 2020, and at the time, one of the most chilling warnings came from hedge fund legend Bill Ackman - who told CNBC that Hilton Worldwide (HLT) was “going to zero” unless the government instituted a 30-day national shutdown to slow the spread of the coronavirus.
A year later, Hilton’s share price has surpassed its pre-pandemic levels and looks poised to generate outsized returns for investors as a perfect stock for the reflation trade.
With a portfolio of 18 world-class brands comprising more than 6,400 properties and more than one million rooms in 119 countries and territories, look for HLT to continue its impressive run in the medium to long term.
Acuity Brands (AYI) is a deeply undervalued company that provides lighting products for commercial, institutional, industrial, and residential applications. Their customers include electrical distributors, electric utilities, retail home improvement centers, and lighting showrooms.
What few investors realize is, Acuity will be a major beneficiary of President Biden’s recently announced $2 trillion infrastructure bill which will allot hundreds of billions of dollars for the construction of home/community care, affordable housing, roads and bridges, and school construction.
All of these projects utilize commercial lighting solutions in some form and Acuity is the leading supplier of lighting products for all of these applications.
This positions Acuity as an excellent opportunity to play the reflation trade today with an incredibly bright long term outlook.
As of this writing, AYI’s stock has rebounded to pre-pandemic levels but is still well off its all-time highs reached in 2016.
Comcast Corporation is uniquely positioned to benefit from reflation.
The company’s global media and technology assets have propelled the stock through the worst of the pandemic. In fact, even through lockdowns and stay-at-home orders, they’ve been able to seamlessly deliver broadband, wireless, and video through their many brands, and they've been able to deliver entertainment, sports, and news as well.
But as reflation policies begin working their way through the economy, one of the businesses that could benefit immensely is company's Universal Studios theme parks. Furthermore, CMCSA’s film and TV businesses should soon return to normal production schedules and its newly launched Peacock streaming service could get a boost from a rebound in the advertising market as well.
All of these factors make CMCSA an attractive stock if you’re looking for a strong reflation trade.
As mentioned, hotels have been one of hardest hit sectors in the market.
However, Marriott - similar to Hilton Worldwide - is a best of breed stock that stands to benefit immensely as vaccine distribution accelerates, business and leisure travel resumes, and the tourism industry recovers.
The Bethesda, Maryland company has a portfolio of more than 7,600 properties under 30 leading brands spanning 133 countries and territories. Marriott operates and franchises hotels and licenses vacation ownership resorts all around the world.
Although Marriott is now trading at pre-pandemic levels, the stock has not surpassed levels reached way back in January 2018. Look for this reflation stock to accelerate in the medium to long term.
While some of the other companies on this list have been deeply affected by the coronavirus pandemic, one company that’s been chugging along is Restaurant Brands International Inc.
QSR owns Burger King, Popeyes, and the Canadian fast food chain Tim Hortons. It is one of the world's largest quick service restaurant companies with approximately $31 billion in annual system-wide sales and 27,000 restaurants in more than 100 countries and U.S. territories.
The company is emerging from the pandemic in a position of strength. QSR’s investments to drive accelerated digital sales came just at the right time as consumer purchasing habits rapidly moved online during the pandemic.
Meanwhile, their drive-thru services have been proven to be a safe and efficient sales channel, especially with governments mandating dining room closures.
As the economy returns to a level of normalcy and as more states begin to open back up, look for QSR to grow significantly in the months and years ahead.