Why investors should position their portfolio for inflation

Despite inflation officially remaining low, a fund manager has highlighted that inflation rise is coming, with investors urged to position their portfolios accordingly.

Australia’s official inflation rate remains low, with data from the Australian Bureau of Statistics showing that over the March quarter the consumer price index (CPI) rose by 0.6 per cent, giving Australia an overall CPI of 1.1 per cent.

This remains well below the Reserve Bank of Australia’s (RBA) 2 to 3 per cent target, which is when they will lift rates.

“Despite the strong recovery in the economy and jobs, inflation and wage pressures are subdued,” Dr Lowe stated.

“While a pick-up in inflation and wages growth is expected, it is likely to be only gradual and modest. In the central scenario, inflation in underlying terms is expected to be 1½ per cent in 2021 and 2 per cent in mid 2023,” he said.

While inflation officially remains low, Datt Capital’s Emanuel Datt advises investors to modify their portfolio, saying there is evidence of inflation on the ground, despite the official figures.

“In practical terms, we’ve seen broad price rises in almost every aspect of everyday life across the board over the past 12 months,” he said.

“We ourselves have noticed large price increases in an array of services such as Uber fares, home food delivery prices and the cost of skilled blue-collar services like plumbing. We have also observed that hardware wholesalers have recently at times experienced shortages of basic items such as timber.”

Sectors to target

Should inflation rise and central banks begin to lift rates, Mr Datt suggests investors should target ‘real assets’, including hard commodities like metals, soft commodities like agriculture, real estate and listed equities.

“We also consider companies experiencing sustainable organic growth are attractive in this environment, as typically growth multiples contract in line with inflation allowing investors with a longer time horizon to benefit from purchasing these assets at lower, out-of-cycle valuations,” he said.

Mr Datt is quick to point out that companies that have performed well during the low inflation environment are likely to underperform the market if inflation returns.

“A high inflation environment also affects various assets negatively. We would avoid fast-moving consumer goods (FMCG) and direct-to-consumer (DTC) technology companies and fixed income investments,” he warned.

“FMCG companies are generally disproportionately affected by rises in commodity prices due to higher input costs. Generally, packet sizes are reduced to attempt to maintain margins with eventual shifts towards increased end prices, which tend to reduce overall margins. DTC technology companies tend to be exposed to a deflationary price environment over time with little pricing power. This factor means that price rises to customers are difficult despite higher input costs,” he concluded.

Speak with us to find out more about the types of investments that may suit you, call us at (08) 8211 7180 or info@centramoney.com.au.

Article by Cameron Micallef on 08 June 2021 – nestegg.com.au

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