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Shares of oil giants and European infrastructure companies can act as a hedge against inflation while also delivering strong annual growth, according to fund manager Freddie Lait. Lait, chief investment officer at Latitude Investment Management, said he sees oil and gas stocks like BP and Shell as “natural” hedges, given the strong link between energy prices and inflation. In addition, he named French infrastructure and construction group Vinci as a “long-term defensive business” with good “inflation-linked” earnings. Lait manages two funds — the Latitude Horizon Fund and the Latitude Global Fund — with more than $750 million of assets collectively and holds all three stocks in both funds. BP SHEL 1Y line The fund manager explained that with oil currently around $85 per barrel, and his assumption of $70-75 long-term, his oil and gas stock picks can generate nearly double-digit annual returns for shareholders. “I think BP and Shell probably have an average capital return — so that’s share buyback plus dividend without assuming any growth — of nearly 15% a year,” Lait told CNBC Pro Talks Wednesday. “So as a natural hedge within a portfolio, we think that they’re the best thing you can be investing in at the moment.” Lait, who started his career as an analyst at Goldman Sachs in 2005, believes oil supply is constrained after years of underinvestment. He said annual capital expenditure in the sector has fallen from nearly a trillion dollars to half a trillion today. Even Saudi Arabia’s state-controlled Aramco, the world’s largest oil producer, announced last month that it was pausing plans to raise its crude production capacity further. Meanwhile, demand for oil and gas is expected to continue rising for years ahead , according to the International Energy Agency. ‘Phenomenally interesting’ stock Beyond energy names, Lait said his favorite inflation-linked stock is Vinci which he described as “phenomenally interesting.” The company operates a mix of toll roads and civil engineering projects with long-term inflation adjustment mechanisms. DG-FR 1Y line Vinci also owns 70 major airports worldwide, including London Gatwick in the U.K. and Hollywood Burbank and Atlantic City International in the United States. Lait says Vinci can deliver 10-12% earnings growth annually, possibly more if inflation rises, while paying a 3-4% dividend. He added that private equity firms were raising huge infrastructure funds to buy similar assets for over twice the valuation multiples; “there’s a massive arbitrage” in owning Vinci shares instead, according to the fund manager. He also said the stock has upside in a “no-landing” economic recovery. A so-called “no-landing” is where a recession is avoided and the economy continues to grow (in contrast to a recessionary “hard landing”). This scenario, however, sees risks for inflation to re-emerge.
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