According to fund manager Freddie Lait, shares of European oil giants and infrastructure companies can act as a hedge against inflation and at the same time deliver strong annual growth. Lait, chief investment officer at Latitude Investment Management, said he views oil and gas stocks such as BP and Shell as “natural” hedges, given the strong link between energy prices and inflation. Furthermore, he called the French infrastructure and construction group Vinci a “long-term defensive business” with good profits “linked to inflation”. Lait manages two funds, the Latitude Horizon Fund and the Latitude Global Fund, with more than $750 million in assets combined and holds all three securities of both funds. BP SHEL 1Y Line The fund manager explained that with oil currently around $85 a barrel and his $70-75 long-term assumption, his oil and gas stock picks can generate nearly double annual returns figure for shareholders. “I think BP and Shell probably have an average return on capital — so stock buybacks plus dividends without assuming any growth — of close to 15% a year,” Lait told CNBC Pro Talks on Wednesday. “So as a natural hedge within a portfolio, we think they are the best thing you can invest in right now.” Lait, who began his career as an analyst at Goldman Sachs in 2005, believes oil supply is limited after years of underinvestment. He said annual capital spending in the industry has fallen from nearly a trillion dollars to half a trillion today. Saudi Arabia’s state-controlled Aramco, the world’s largest oil producer, also announced last month that it was suspending plans to further increase its crude production capacity. Meanwhile, demand for oil and gas is expected to continue to increase in the years to come, according to the International Energy Agency. Stocks ‘Phenomenally Attractive’ 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 Vinci also has 70 major airports around the world, including London Gatwick in the United Kingdom and Hollywood Burbank and Atlantic City International in the United States. Lait says Vinci can deliver earnings growth of 10-12% annually, perhaps more if inflation rises, by paying a 3-4% dividend. He added that private equity firms are raising large infrastructure funds to buy similar assets for more than double valuation multiples; “There is instead enormous arbitrage” in owning Vinci shares, according to the fund manager. He also said the stock has upside in a “no-landing” economic recovery. A so-called “no-landing” occurs when a recession is avoided and the economy continues to grow (as opposed to a recessionary “hard landing”). This scenario, however, sees the re-emergence of inflation risks.