Four hedges against inflation to buy now

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Julian Chillingworth, chief investment officer and manager of the Rathbone Blue Chip Income and Growth Fund.

We believe we are in the midst of a U-shaped recession, and growth will remain anaemic into 2010. Despite a recent knee-jerk bounce in cyclical stocks, investors don't want to buy in too early, as earnings growth and ratings may yet surprise on the downside. However, the current environment is a great buying opportunity for those prepared to take a five-year view on equity markets. Now is the time for careful, considered entry into well-run firms with strong cash-flows and growth potential.

Meanwhile, the debate over inflation/deflation continues. We believe the huge amount of stimuli thrown at the system makes higher inflation inevitable in the long run. So income stocks, particularly at these levels, offer an attractive hedge. Income is also a high priority for investors as bank and building society deposits get left behind. With quality income stocks, investors are being paid to wait.

Halfords (LSE:HFD) is a favoured stock and a well-run retailer of car maintenance equipment. Why are we holding retailers when consumers are under such pressure? We believe Halfords' offering is reasonably recession-resistant, it enjoys very strong cash flow and has a high-quality management team. The stock trades on a p/e of 10.6 times and yields 4.74%.

Venture Production (LSE:VPC) has crept into our top ten holdings. This Aberdeen-based company specialises in unlocking stranded North Sea assets and recently saw some stake-building by Centrica. Behemoths like Centrica have realised there's a shortage of available gas assets and the firm has built up its stake around net asset value. We think it is very likely that Centrica will eventually bid for Venture. Generally speaking, interest in the company shows how investors can still find interesting opportunities in resources, despite a falling oil price. Management also continues to impress. Venture is trading on a p/e of 15.1 times and has a yield of 1.63%.

Diageo (LSE:DGE) has a rising dividend stream and cash flow, which are driving the stock price higher. Diageo is the maker of successful brands, such as Guinness and Johnny Walker apparently, a bottle of Johnny Walker Red Label is sold every six seconds somewhere in the world but even during these recessionary times it only requires a consumer of Johnny Walker in America to buy two or three bottles a year to maintain sales at this level. This suggests Diageo ought to weather the current storm fairly well. But more importantly, the stock price over time has been driven by that rising dividend. Diageo is on a p/e of 12 times and yields 4.52%.

Finally, mobile operator Vodafone (LSE:VOD) has of late had a strong push into emerging markets. The stock price was overdone during the dotcom boom and the dividend distribution lagged this rise. This situation has now reversed, although the share price should start to catch up as investors realise that the stock should weather the 'telecoms storm' pretty well. Again, Vodafone fits the bill in terms of strong dividend growth coming through; good cash flow; a cash-flow yield of about 9%; a p/e of nine times; and a yield of 6.15%. We'll monitor how the new management team is getting on, but believe we have a consistent performer here.

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