Bet on Europe's utilities and grocers as inflation rises

By Amanda Cooper - Analysis

LONDON (Reuters) - There is no way to fully inflation-proof an equity portfolio, but Europe's utilities and food retailers may be the best bet in the current period of soaring commodity prices and an uncertain economic outlook.

Consumers need only take a car trip to the supermarket or glance at their gas and electricity bills to see how the surge in commodity prices has trickled down and sparked concern among central bankers struggling to beef up their slowing economies.

Prices of basic foods such as wheat, corn, coffee and cocoa have racked up double-digit percentage gains this year, along with oil and precious and base metals.

For an equity investor, defensive stocks such as the food and beverage sector, utilities, drug makers or tobacco firms traditionally do well when consumers tighten their belts.

The key to riding this wave of inflation is to buy into companies that service unavoidable consumer needs, like switching on a light or turning on a tap at home.

"Utilities certainly are a big winner here," said Ian Richards, a European equity strategist at ABN AMRO.

The diverse pricing structures of the wholesale European power markets and the complexities involved in retail pricing mean that the method of passing on rising energy prices to consumers is not always very transparent.

Analysts say power generating companies are more likely to benefit from higher oil prices than companies that focus more on distributing, which can face backlashes from governments and consumers when household electricity and gas bills rise sharply.