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    Home»Kuo’s Smart Take»Smart Thought Of The Week: Pricing Power
    Kuo’s Smart Take

    Smart Thought Of The Week: Pricing Power

    David KuoBy David KuoJune 19, 2021Updated:June 19, 20213 Mins Read
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    It was billed by some as the most important Federal Reserve meeting, ever. There’s nothing quite like hyperbole to get people interested in a routine US interest-rate decision.

    As it turned out, the June Federal Open Market Committee meeting was a bit of a non-event. But that hasn’t stopped some pundits from analysing every syllable of every utterance from Fed chair Jerome Powell.

    It’s a good job he didn’t smile or raise an eyebrow at the wrong moment. Heaven only knows what could have happened if he had.

    Yes, the Fed said that it was closely watching inflationary pressures. Yes, the Fed is preparing markets for the day when it may not need to buy as many bonds. And yes, the Fed has signalled that it will need to raise interest rates.

    But didn’t we expect all of that, already? At some point, the global economy will not require as much stimulus from central banks because life has returned to normal. That is a good thing. That is healthy.

    When that happens, the last thing we want is central banks providing more stimulus. That would be akin to pouring petrol onto a roaring fire.

    But central banks need to be absolutely certain that the economic recovery we are seeing is on a firm footing before they actually withdraw their support. For now, they can talk about how to taper their bond-buying programmes. They can even talk about raising interest rates.

    But talking is not the same as doing. Eventually though, they will have to do what they say they will do. As far as we investors are concerned, it shouldn’t let that change the way we invest.

    Warren Buffett once said: “If the Fed chair were to whisper to me what his monetary policy was going to be over the next two years, it wouldn’t change one thing I do”.

    Point is, we need to be confident that the businesses we invest in can cope with rising interest rates in the face of higher inflation. These companies need pricing power, which is the ability to raise prices when needed.

    Amongst the 30 companies that comprise the Straits Times Index, around a third have moderate pricing power. About a quarter have adequate pricing power. But the rest have yet to demonstrate that they can, in the words of Warren Buffett, raise prices without holding a prayer session first.

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    David does not own shares in any of the companies mentioned.

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