Even though stock markets might be looking ahead to a pause in interest rate hikes, the real world is still grappling with stubbornly high inflation.
The yearly increase in Australia’s consumer price index stands at 7.8%, which is far higher than what the Reserve Bank would like.
It also means that $100 in your wallet one year ago now only has $92.20 of spending power.
Fidelity International investment director Tom Stevenson is worried about the longer-term consequences.
“It’s a worrying reminder that, when the dust has settled, we may find ourselves in an ongoing environment of higher structural inflation,” Stevenson said in the UK’s The Telegraph.
“Even a mildly inflationary environment can be a tricky one for investors to navigate.”
Inflation is a corrosive ‘tax’ on your investment returns
As well as the obvious cost-of-living pressures imposed on everyday consumers, high inflation is also an “insidious tax” on investors.
A simple reverse application of The Rule of 72 quickly shows how inflation eats into capital, according to Stevenson.
“Divide the expected rate of inflation into 72 and the answer indicates how many years it will take to halve your real, inflation-adjusted purchasing power,” he said.
“At 6%, it will only take 12 years. That 25-year retirement you are hoping for might halve your real wealth twice.”
That means that the first priority for investors in 2023 is to minimise the gap between investment returns and the rate of inflation.
“Keep the difference to 3% and the halving of your real wealth will take 24 years. At 2% the reduction will take 36 years,” said Stevenson.
“Reduce it to zero and, self-evidently, you will keep your head above water in real terms.”
Then obviously you want to earn an investment return on top of this break-even point.
These are the rocks to look under
So where are you going to find an asset to reliably bring back at least 7.8% per annum?
According to Stevenson, the first admission that investors need to make is that exceeding or even just matching inflation in the current environment will involve taking on some risk.
“Cash won’t cut it and fixed income investments like bonds will only be useful in spurts, as and when interest rates come down to tackle slowing growth. This year may be one of those, but longer-term I donât expect bonds to be the answer,” he said.
“Even inflation-linked bonds offer only a partial solution.”
So turning to equities, Stevenson suggested seeking stocks living in one or more of five areas.
First is to invest in dividend-paying ASX shares.
“No chief executive wants to cut the pay-out to shareholders so dividends tend to be the more stable component of a shareâs total return.”
Second is to focus on the finance and commodities sectors.
“A bank makes its profit in the gap between what it charges to lend you money and what it will pay you to borrow your cash. In a higher rate environment that gap is likely to be wider,” said Stevenson.
“Commodities, too, are often good performers in an inflationary environment, not least because higher prices for oil, gas, food and metals are often a contributor to inflation in the first place.”
Thirdly, take a look at “defensive” sectors producing goods and services consumers just can’t cut out. Stevenson suggested supermarkets and household product makers meet this criteria.
“Fourthly, look for companies with pricing power,” said Stevenson.
“These companies are more likely to be at either end of the scale — either luxury goods companies selling things to people that don’t know there’s a cost-of-living crisis or low-cost, feel-good providers like McDonald’s Corp (NYSW: MCD) for those that do.”
The final area to search for are businesses that are “part of the solution”.
“Inflation or not, people will continue to seek answers to the worldâs problems. That might come in the form of a renewable energy company or a cloud computing business.”
The post 5 types of ASX shares to buy for high inflation times: expert appeared first on The Motley Fool Australia.
Should you invest $1,000 in right now?
Before you consider , you’ll want to hear this.
Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now… and wasn’t one of them.
The online investing service heâs run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.
See The 5 Stocks
*Returns as of February 1 2023
(function() {
function setButtonColorDefaults(param, property, defaultValue) {
if( !param || !param.includes(‘#’)) {
var button = document.getElementsByClassName(“pitch-snippet”)[0].getElementsByClassName(“pitch-button”)[0];
button.style[property] = defaultValue;
}
}
setButtonColorDefaults(“#0095C8”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#0095C8”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#fff”, ‘color’, ‘#fff’);
})()
More reading
- 3 ASX dividend stocks to try and turn $10,000 into $1 million!
- 2 ASX gold stocks on the move following results updates
- Morgans names 2 ASX 50 shares to buy now
- Just how low could the Novonix share price go?
- Here are the top 10 ASX 200 shares today
Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
from The Motley Fool Australia https://ift.tt/tcblnPR
