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Fund manager says inflation’s here to stay, but 2 beaten-down stocks could still do well

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Many investors have put their concerns about inflation on the back burner, thanks to a strong stock market rally in the second half. But those concerns are resurfacing, with a pullback in stocks this week and U.S. Federal Reserve Chair Jerome Powell’s speech at Jackson Hole. Easing inflationary pressures in July had raised hopes that inflation had peaked, but fund manager Jordan Cvetanovski thinks “it’s here to stay.” “The market is banking on core inflation coming down fairly quickly. We believe inflation will stay higher for longer and rates will be higher than expected. Even if energy and supply challenges ease, inflation won’t be easily tamed,” Cvetanovski, founder and chief investment officer at Pella Funds Management, told CNBC “Street Signs Asia” on Tuesday. So where is he putting his money? U.S. discount retailer Dollar General is one of his top picks. “We think that in general, discount retailers across the globe will benefit from this trend in the U.S. In particular, Dollar General is one of those companies that has actually done well in past crises. In fact, it had very strong sales growth during both the [Great Financial Crisis] and the lockdown years of the Covid-19 pandemic,” Cvetanovski said. He expects Dollar General will able to pass on any prices increases to consumers, while benefiting from consumers trading down from “more expensive retail purchases to better bargains elsewhere.” The company sells “everything staples,” which are less price sensitive for consumers compared to discretionary items, he added. Cvetanovski also likes sports fashion retailer JD Sports , a company he described as a “well managed business that is able to grow in a weak environment.” “If you look this company, historically, it has grown like-for-like for 10% over the last 10 odd years, and even in this environment, it’s managing to grow like-for-like 5% per annum, which is a very good outcome. Putting valuation aside for a second. we think that’s great execution,” he said. The company’s main customer base — 16- to 25-year-olds with a side gig — is also “still quite a resilient part” of the consumer market, he added. Cvetanovski said JD Sports could grow significantly by adding new stores and could take advantage of weakened competitors in the U.S. and Europe to engage in mergers and acquisitions. The stock also looks attractive from a valuation perspective, he added. “It has gone to the cleaners and is priced for a disaster. We think [the stock] is far from it.” What’s next for retailers Retailers are increasingly facing margin pressures, thanks to higher labor and input costs as well as shrinking consumer spending power. How, then, should investors position themselves for these conditions? “We think one should stick to companies that are executing really well, are well managed, have strong balance sheets and have shown to do well during a crisis and they take advantage of that,” Cvetanovski said. “To cut a long story short, some retailers will do very poorly, while others will take advantage of this to do well relative to their competitors. So, it really will require some specific stock picking, if you like, and bottom-up understanding of the company we’re investing in,” he added.

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