"July Price Peak-Out"... Put 'Food Stocks' in Your Shopping Basket

Inflation and Engel Index Soar
Price Increase Pressure to Persist for a While
'Inflation Defense Stocks' Investment Appeal

[Image source=Yonhap News]

[Asia Economy Reporter Kwon Jae-hee] As global inflation concerns emerge as a key variable in the stock market, 'inflation defense stocks' are gaining attention. With soaring inflation and a rising Engel's coefficient, eyes are turning to food stocks that have an inflation hedge effect.

According to the consumer price trend for April announced by the Statistics Korea the day before, the consumer price index last month was 106.85, up 4.8% from the same month last year. This is the highest level in 13 years and 6 months since October 2008 (4.8%), continuing a high inflation trend in the 4% range for two consecutive months following March (4.1%). In particular, concerns are growing that high inflation will continue for the time being as consumer prices are expected to reach 5% in July. KB Securities forecasted, "Prices will peak around 5% in July."

The Engel's coefficient, which indicates the proportion of food expenses in household spending, is also rising along with unprecedented inflation. According to the Hyundai Research Institute, the Engel's coefficient recorded 12.9%, the highest in 21 years.

Moreover, as the outlook that such inflationary pressure will continue for the time being is dominant, interest is focusing on food stocks that have an inflation hedge effect. Representative stocks include CJ CheilJedang, Nongshim, Lotte Chilsung, and Hite Jinro. They have strong market dominance and high price pass-through power, and since they are essential goods, consumption does not shrink significantly even if prices rise. In fact, since the beginning of the year, the food and beverage sector's stock price has outperformed the KOSPI average by 9.4 percentage points.

Among the representative food stocks, CJ CheilJedang was steadily net bought by institutions for 17 out of 20 trading days from April 6 to May 3. Foreign investors also paid attention to food stocks; during the same period, foreigners net bought Hite Jinro for 16 days.

Shim Eun-joo, a researcher at Hana Financial Investment, analyzed, "With high dining-out prices and price increases by major food and beverage companies, profit leverage is expected to start in earnest," adding, "The food and beverage sector is located at a historical bottom, so buying at the low point is rather effective."